In brief - Take heed of warning signs of declining financial health
Continuing losses, overdue taxes, unhappy creditors and a deteriorating relationship with your bank can all be indicators that your company's financial situation is deteriorating. However, you can take action to protect your business.
Borrowing conditions currently favourable to SMEs
If you currently operate a business in Australia, borrowing conditions are certainly in your favour with Australian financial institutions. The combination of low interest rates, negotiable terms and the ability to shop around gives borrowers a choice of lender, and the ability to highly leverage themselves in a relatively soft market.
Businesses may not need to worry about a turn in the market at this point. However, what indicators should businesses look out for in their balance sheet to signal that perhaps the good times have started to slow?
Are there continuing losses?
A series of losses does not necessarily mean that your business is insolvent. As long as working capital resources are available to meet those losses, insolvency can be avoided.
If, however, your working capital is diminishing and your losses are increasing, then this could be an early warning signal that your business's financial health is starting to decline.
Are there overdue Commonwealth or state taxes?
Whilst many (well, most) have an aversion to paying their taxes, a refusal to pay taxes usually derives from the inability to meet those tax payments, rather than one's extreme aversion to handing over money to the government.
However, don't let this one trip you up. Not meeting your tax and superannuation commitments is a flashing warning signal that your business is in trouble.
Do you have a good relationship with your bank manager?
As a business owner you will usually be required to provide financial information from time to time to the bank. An early sign of the bank's concern with your balance sheet might be the bank asking for further information outside of the usual documentation provided to the bank on a half yearly or yearly basis.
A poor relationship with the bank usually stems from non-payment of moneys due to the bank or placing the bank in a position where it is forced to regularly dishonour cheques (even though rarely used these days!)
What other finance options are available to you?
If your relationship with the bank is deteriorating, do you have other financial alternatives available to you? If there is a cash flow problem and your business is unable to convert short term debt to long term debt to overcome a possible cash crisis, or you are unable to replace debt with equity in the business to fix the lack of present funds, this is likely to indicate liquidity issues.
How happy are your creditors?
Keeping your creditors comfortable and paid on time within the terms of payment is important. A creditor will usually let you know if you have not made a payment on time.
A deterioration in your relationship with a creditor can be shown when that creditor places you on COD terms. This may demonstrate a lack of faith in the liquidity of your business and in your ability to meet the creditor's payments when they fall due.
The above are only some of the indicators that your balance sheet's financial health may be on the downhill. However, there are legitimate ways that you can attempt to protect your business from a change in the market if any of the above indicators are triggered.
This article has been published by Colin Biggers & Paisley for information and education purposes only and is a general summary of the topic(s) presented. This article is not specific legal or financial advice. Please seek your own legal or financial advice for any questions you may have. All information contained in this article is subject to change. Colin Biggers & Paisley cannot be held responsible for any liability whatsoever, or for any loss howsoever arising from any reliance upon the contents of this article.