In the current economic circumstances business owners and managers should be monitoring their business' solvency so as to avoid potential problems.
Signs of potential insolvency include:- Declining profit margins - leaders should be conscious of gross profit percentages and net profit percentages
- Declining cash flow - this can be caused by delay in payments from debtors; demand from creditors for earlier payments; build-up in stock and work-in-progress levels; or unnecessary capital expenditure
- A high level of staff turnover can be a clue of some financial instability in the business
- Creditors putting a stop on supplies - can be a real indicator that something is wrong with the business
- A never decreasing bank overdraft is also a danger sign
- Loss of a major customer can cause instability in the business
- Falling behind in payments of GST and income tax
- Incurring interest on credit card balances
- Paying creditors well beyond their stated terms of trade can highlight financial problems and could be very dangerous if the creditor stops supply and demands immediate payment
If any of these problems are occurring in the business, the earlier the business asks their accountants for a full review of business activities, the better, so that a policy can be determined, including:
- Full diagnostic review of the business
- Review of debtors, stock and work-in-progress levels
- Review of creditors to determine days taken to make payments compared to creditors' terms of trade
- Update or preparation of a business plan which outlines the business' strategies for successful trading over the next 12 months. This will include budget and cash flow projections.
The key thing for the business leader to do is to take action and not sit in the hope that the situation will improve itself. This will mean maintaining relationships with the bank and keeping the bank informed; talking to key customers and entering into realistic payment arrangements with suppliers; keeping team members informed so that they are able to answer comments being made to them by customers and suppliers; and at the same time, continue to be outstanding ambassadors for the business. If things are 'off the rails', accept that changes are necessary even though some of them may be painful.
If you have any concerns about your business' performance in the current circumstances please contact us.