“Acting on early warning signs increases survival chances”
Act early
All directors should be alert to signs of insolvency. The sooner early warning signs are detected and acted on, the more likely the business will be able to survive. Early warning signals do not necessarily mean the business is likely to fail. However, the more warning signs detected, the stronger the evidence of financial pressure and likelihood of insolvency.
What are some of the early warning signs?
- Evidence of internal control breakdowns
- Financial reports are not provided to the board on time or are provided with insufficient time for the board to consider before the board meeting
- Evidence of worsening financial situation such as high and increasing gearing (debt to equity)
- Delaying creditor payments – very concerning if delaying pay as you go tax payments and superannuation payments
- Regularly requesting suppliers to extend terms of trade, suppliers demanding cash on delivery or cash with order
Consequences of insolvent trading
The law deals with consequences directors face when trading while insolvent. Explicitly, directors can become personally liable for debts when the company continues trading while insolvent.
How can Charles & Co. can help?
Charles & Co has worked shoulder to shoulder with numerous clients on business turnaround projects. Engaging with us early followed by a well crafted strategy can improve the chances of a business surviving.