Common red flags of potential distress in a business
Company directors, both non-executive and executive, must remain informed about the company’s true financial situation. When faced with financial stress, directors should take positive steps to ensure the business can meet its obligations.
Our experience tells us that business owners who detect issues, obtain professional advice, and resolve issues early have a much better chance of safeguarding the company’s survival.
In this article, we summarise some common red flags that could indicate financial distress and what directors should do to address them.
What are the common red flags of potential distress in a business?
Across our journeys, we have observed the following factors that have adversely affected business performance and cash flows:
- Inability to generate cash from its trading activities.
- A trend of continuous losses and insufficient working capital that shows the business has no ability to absorb losses and meet its obligations.
- Difficulties selling its goods/services or collecting debts owed to it generally indicate quality issues.
- Suppliers not being paid on agreed terms, refusing to provide further goods or services without cash on delivery terms or seeking additional security.
- Inability to pay taxes and superannuation contributions.
- Enforcement of debts or commencement of legal proceedings to recover outstanding debts.
- Exhausted funding facilities and unable to strike a deal with financiers.
- Inability to produce timely & accurate financial information that shows trading performance, financial position and forecasts.
- Resignation of directors and key management who are concerned about company’s affairs.
- Auditors providing a qualified opinion on the company’s ability to continue as a going concern.
What should or must directors do in those situations?
The Australian Securities and Investments Commission’s Regulatory Guide 217 – Duty to Prevent Insolvent Trading: Guide for Directors has outlined 4 key principles that directors must or should do:
- Directors must remain informed.
- Directors should investigate financial difficulties.
- Directors should obtain advice.
- Directors should act in a timely manner.
If an organisation cannot meet its debt obligations and the directors suspect insolvency, they should seek professional advice that can explore:
- Utilising the safe harbour provisions which shield the directors from insolvent trading exposures whilst they develop a course of action that is reasonably likely to lead to a better outcome than an external administration; or
- Using the small business restructuring or voluntary administration processes with a view to restructure the company’s affairs whilst continuing to trade; or
- Appointing a liquidator when a business has no viable future.
How can Charles & Co. help you?
Our Team with more than 50 years combined experience is well placed to help businesses and individuals in a range of challenging and distressed situations. We encourage anyone experiencing financial and/or operational distress to contact us to discuss your options.