Today we are talking about recognising the warning signs of insolvency in your business. The rising cost of living crunch, rising interest rates, rising prices, business difficulties, labour etc, are all putting pressure on your business.
You need to recognise these signs so you can take proactive action if required.
It is essential that you are conducting cash flow analysis to ensure that your business is remaining solvent, as the consequences of trading insolvently can be quite severe for business owners. However, it’s not always easy to recognise when your business is facing terminal solvency issues, so we are seeking to help you understand what the warning signs of insolvency are. And to recognise the different stages of solvency analysis for your business.
The starting point is recognising what is ‘solvency’. Section 95. A of the Corporations Act says that a company is solvent if and only if it can pay its debts as and when they fall due and payable.
What this means is that the test for solvency in your business is a cash flow test and not a balance sheet test or a test of the assets.
The reason for this, is that a balance sheet is not always a reliable summary of the financial position of your business. The value for assets on your balance sheet can be inflated or inaccurate, and often doesn’t take into account any updates or circumstances that your business might be dealing with.
The quickest test is if your business is paying its debts on time. Business owners tend to be optimistic, and we always like to think that the next big job coming in is going to solve all our problems. However should things go wrong and your business ends up in the hands of a liquidator, they may view your business very differently to you.
To help you make your business stronger and more secure in these unpredictable times, it’s worthwhile you understanding and recognising the three separate stages of insolvency:
- STAGE 1: Early warning signs of insolvency
- STAGE 2: Substantive warning signs of insolvency
- STAGE 3: Critical warning signs of insolvency
To really understand the signs in each of these stages, please watch the video above, and download our fact sheet to get a better understanding. If any of the STAGE 3 warning signs are present in your business, it’s likely that the countdown has already commenced to the date in which the court is going to appoint somebody to your business to wind it up. However it is all avoidable if you seek help and act in the earlier stages.
It’s also important that you realise the issuance of director penalty notices or liability for insolvent training, breach the corporate veil and will make you personally liable for the company’s debts. By talking with qualified advisors, there are still a number of options available to allow you to turn around your business and even save it.
- liquidation of the business
- the running of a voluntary administration
- or the use of the Small Business restructuring regime
Even if the critical warning signs are present you still have options.
Contact myself or any of the team at O’Brien Palmer. We are happy to have a discussion with you on a no fee and no obligation basis about the circumstances in your business, and the options available to you to turn it around.
Liam Bailey, Managing Partner