A business going under can feel sudden – but behind every collapse, the warning signs usually stack up long before the doors close. Photo: Gwengoat.
The collapse of Pialligo Estate, PBS Building and Project Coordination in the same year shocked creditors, staff and the wider Canberra community. But experts say business failures rarely come out of nowhere – and many can be avoided.
No single litmus test exists for a business to assess its financial health; indicators of trouble are often industry- or size-specific.
But as director of Restructuring & Recovery at RSM in Canberra – a division that worked with all three of these high-profile cases, to name a few – Adam Cormack says there are lessons for businesses to learn.
“The first is a bit textbook, but it’s valid – we are always better placed to preserve the value of a business and deliver the best outcome for clients through early intervention,” he says.
“If someone is experiencing some form of financial difficulty, the earlier they engage with us, the more options will be available to them.”
It’s normal for a business to experience financial peaks and troughs, but important to separate these temporary stresses from the kind of financial distress that leads to insolvency.
Classic signs of the latter are continuing losses, overdue taxes, declining relationships with banks, creditors, clients and staff, and the inability to raise more capital.
But many lesser-known red flags exist.
“Regular board disputes or shareholder disagreements on strategies can be a sign of uncertainty in an enterprise’s viability,” Adam says.
“Another red flag you don’t often read about is a persisting belief that the next job is the one that’ll solve all your problems. It’s human nature to battle through the challenging times, but at the coalface it’s easy to miss how pressure from small jobs can quietly build.
“Remember cash in the bank doesn’t equal profitability – especially in a business where there could be loss-making ventures. Be mindful that a deposit received for a new project could in fact be funding the cost of an old project.”
RSM director, Restructuring & Recovery Adam Cormack. Photo: Thomas Lucraft.
With insolvency as with everything, prevention is better than cure. Business adviser Adam says the key is systemising how you identify and respond to early warning signs – starting with cash flow.
“You want to set up regular reviews of your cashflows not only as a whole, but for each individual job, client or project as well,” he says.
Monitoring these smaller moving parts helps uncover loss-making areas early, before they drag down the business.
From the outset, it’s important to know how you’ll assess whether a client, project or revenue stream is still worth the cost.
Trying to do everything might feel like a natural path to growth, but it can create serious problems – especially in industries such as construction where risk profiles vary greatly.
“Look at construction, for example,” Adam says. “There are big differences between commercial and residential, and between government and private development contracts. Trying to offer it all when you don’t have experience in one sector can cause challenges.”
The same principle applies when expanding across borders. Different states and territories bring different rules – from payroll tax to workers’ compensation schemes – and failing to account for them can quickly lead to trouble.
RSM national head of Restructuring & Recovery Frank Lo Pilato stresses the importance of timely collection of debtor payments, as well as spick and span record keeping.
“This isn’t just to ensure business as usual runs smoothly, but so you can meet any regulatory requirements, and especially keep your obligations with the ATO,” he says. “That’s one thing no company big or small can lapse on.”
Even when professionals find a business to be insolvent, there may still be value to recoup.
The outcome, while difficult, may not be as bleak as you anticipate.
“Depending on their specific situation, we can explore ways of continuing to trade and return value to all stakeholders,” Adam says.
One of the first steps is getting a handle on what to expect in the journey ahead.
RSM’s Restructuring & Recovery team creates a roadmap so you understand any challenges to come.
“Engagements are all bespoke, but with proper planning you can anticipate most challenges that may arise in the course of those administrations,” Adam says.
For more information contact RSM in Canberra.
