The Australian insolvency statistics report recently released by ASIC revealed that ASIC received 9,465 initial external administrators' reports between 1 July 2015 and 30 June 2016.
The most common causes of failure were inadequate cash flow or high cash use (45.6 per cent), poor strategic management of business (45.6 per cent) and poor financial control, including lack of records (33.6 per cent).
Planet Consulting founder and principal consultant Rob Pillans told Accountants Daily that the reports highlighted both the opportunity and responsibility for accountants to help their business clients with these things.
“Every firm working with a business client should be ensuring each client is on top of their cash management processes and business management more broadly,” he said.
“The business owner is typically knowledgeable about their own business, but not so much about finance and accounting and general business matters, so it seems to me that accountants do need to be on the front foot when it comes to helping business owners.”
With the most common cause for failure being around cash management, Mr Pillans said that accountants need to have conversations with their clients about their expectations.
“I know from talking to some accountants that sometimes when they start having these conversations with clients, the clients have quite unrealistic expectations,” he said.
“The client, I think, is often looking through, dare I say, rose-coloured glasses. They think ‘Of course, they're going to generate this much revenue’.”
Mr Pillans said that accountants should ensure business owners to focus on projected profits, rather than revenue, to prevent running in to cash management issues.
“It seems, from talking to accountants, that clients will often focus on revenue, and they won't look at the costs that are associated with that, and therefore what is the actual profit,” he said.
“So accountants are so well-placed to help their clients think about those sorts of things, and I suspect that there's still not enough of that going on.”
Mr Pillans also pointed to the range of technology tools available that should prevent companies from failing for these reasons.
“With the advent of low-cost, easy-to-use, cloud-based accounting systems, there surely should be no excuse for businesses having poor financial control and a lack of records,” he said.
“Having cloud accounting systems, which are pretty cheap and pretty easy to use, you would think that it's not too difficult for most businesses to be well set up with those and then to be working with their accountant, perhaps with some additional tools around budgeting and forecasting, and managing cash."