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Accountants are often the first to realise a client’s business is running out of time – if they ask the right questions.
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Telltale signs a business is in trouble
18 May 2022
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11 minute read
Accountants need to be alert to the signs that small-business clients are in difficulty and a checklist of questions can help, said CPA Australia.
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Senior manager business and investment policy Gavan Ord said it could prompt members into having tricky conversations and validate their approach.
Mr Ord said clients were often totally unaware of the issues, primarily because they were not talking to people. “No one’s saying to them, actually your business is in serious trouble.”
CPA Australia’s website features a cheat sheet of danger signs and Mr Ord addressed the issue in a recent podcast with manager of public practice Kristen Beadle, when they ran through a set of key questions that go straight to the viability of a business.
Mr Ord said a single issue might not be fatal in itself, but a combination could spell extreme difficulties ahead.
Are you seeking finance from less reputable sources?
Mr Ord said when businesses struggled to access finance it should be a signal that it needed to improve its financial position.
“Those who are not keeping up to date with their reporting and bookkeeping, or their profit is falling might struggle to refinance with any lender,” he said. “We are seeing some businesses in difficulty struggling to refinance an existing arrangement and therefore, they’re forced to go out to some of those smaller, smaller lenders. So those businesses might struggle over the next two to three years.”
Are creditor days getting longer and drifting outside of your trading terms? Are creditors sending random payments?
“Once businesses get in trouble, to keep a supplier happy they’ll just make random payments,” Mr Ord said. “They might owe $100,000, and pay $72,000. That is definitely a sign that one of your clients is definitely in trouble – that they just pay random amounts of money. They’re just paying what they can.”
Are suppliers demanding to be paid in cash, or refusing to do business with you?
“This is where an accountant would say, sometimes the hard conversations need to be between a supplier and a customer. The accountant could have a client that’s quite successful, but they’ve just got some key customers not paying,” Mr Ord said.
“Sometimes it’s better to stop supplying a customer if they’re just not paying. You’re not in business to be a charity, you’re in business to make money. And you do need to take a hard line on some issues at some point.
“It should be a critical alarm bell, that they’re just not trusting their customer any more.”
Are you using cash from new sales to complete old work?
For a Silicon Valley start-up this might be a feature rather than a bug. But for most, it’s just a matter of time before things go wrong.
“It’s a bit like musical chairs in that situation where it’s fine when the music playing, when the music stops – you’re not getting that next customer through, because interest rates are going up – that’s when everything falls apart,” Mr Ord said.
Are your auditors expressing a qualified opinion?
“It’s not fatal in itself – auditors express qualified opinions regularly. But together with the other factors, it could indicate you’re in a critical stage of your business existence. It depends on the qualification,” Mr Ord said.
Are you struggling to pay your employees and rent?
“An established business that’s struggling to pay rent, struggling to pay employees? That’s a really serious issue when you get to that stage,” Mr Ord said.
And then the questions become more difficult.
“Are you trading while insolvent? If you are, that comes with all sorts of ramifications and potentially criminal charges,” Mr Ord said.
He said a simple equation here did not always yield an answer – it depended on the broader picture.
“For some businesses it’s okay that your current liabilities outweigh your assets. For others it’s not. Seek advice, don’t hold back,” Mr Ord said.
Are you using GST collections, PAYG withholding and super contributions to pay other debts?
“A business is a juggle all the time but now you’re almost in a death spiral, where the number of balls you’ve got in the air is becoming less and less,” Mr Ord said.
“When you get to that this one, you are just basically doing illegal activity. So taking GST and PAYG withholding and super and using it for other things, that’s when you’re in real difficulty. It’s not your money. It’s the government’s money you’re collecting on behalf of the government.”
Mr Ord said the sign that a business in trouble seldom hinged on one wrong answer, but a combination of telltale factors.
“There’s not one single event, all these together could be that trigger or one of them,” Mr Ord said.
“If any of these, you really do need to seek advice because the ramifications for training while insolvent can be significant and getting early advice means more options are available to you as a business owner.”
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