Five tips to reduce the chances of going into insolvency

Ben Walker runs Brisbane-based accounting firm Inspire Accountants, which works exclusively with small business owners. Here he shares some tips and lessons learned over the years that may help businesses avoid becoming insolvent.

First of all, to run through what insolvency is at a high level, it means that the business is not able to pay its bills when they are due.

If the director(s) of the business continued trading reasonably, knowing that the business is struggling to pay its bills in full as and when they are due, this can be seen as “insolvent trading” and comes with heavy penalties, including the possibility of exposing the director’s personal assets.

A common observation I make of businesses going into insolvency is that it doesn’t happen overnight. The writing is on the wall for usually months, but it could even be years of the financial security of the business eroding.

How it normally looks is that the business’s accounts payable will slowly increase and put pressure on the payment terms of the business’s suppliers. We usually see tax debt increase (BAS is the common one), and even superannuation being paid late, or not at all. The business starts to rob Peter to pay Paul, and the owners are super stressed.

If as a business owner, you are, or could be seen to be, trading insolvent, it is important that you seek advice as early as you can. Whether the advice is to steer the ship back in the right direction (even using the tips I’m about to share in this article) or to consult with an insolvency specialist to understand what your options are – it is better to start either of these two things early.

So what do we do to reduce our chances of going into insolvency as business owners?

One: Make sure your bookkeeping is up to date

Without up-to-date and accurate numbers, it’s near impossible for an advisor to assist, and it makes it very difficult to make sound financial decisions about your business.

My recommendation is that you get your bookkeeping done monthly at the absolute least, but it is best to have this done weekly or fortnightly to keep your books right up to date.

If you’re not happy with your bookkeeper or you do it yourself, it’s time to get another one.

Two: Review your financial performance

This is best done with an advisor who can help you interpret your business’s financial performance using the reports available in your accounting software.

But beware: not all tax accountants have commercial acumen and understand these reports on a management level.

Often you will want to compare your numbers between your current and previous periods, compare them to industry benchmarks, and review them for anything that looks out of place.

Three: Review your pricing

Inflation has kicked the guts out of profit margins for businesses all around the world.

How this happens is that if the price of our expenses increases, and the prices we charge to customers does not increase, then the profit we previously made begins to erode.

You don’t want to be in a position where we’re working for free, or worse yet, it’s costing you money to serve clients.

Pricing is the key lever businesses have to increase their profit margin. Now is the perfect time to increase your prices if you haven’t already, as customers are almost expecting it given the fact that the price of almost every input has increased.

My recommendation is to check the last time you increased your prices, because if that was three years ago, you’ll want to make sure that you increase your prices by at least CPI – and not just for the past 12 months, but from the last time you reviewed your prices.

You may lose clients as a result of your increased prices, and a couple of points on that:
• An unprofitable client is not worth keeping.
• If you increase your prices by 10 per cent and lose 10 per cent of your clients, you will have around the same dollar revenue figure, but your costs to deliver will have dropped by 10 per cent.
• Communication is key. Tell your clients why your price is going up. Give them notice and (for the ones we like working with!) let them know it’s absolutely their choice who they use at the end of the day if they’re not happy with the new rates.

My final comment on pricing is to make sure you do this regularly, not just once and then forget about it.

Four: Ensure you have efficiency

When I think of efficiency, my frame here is making sure for every dollar you spend, you are getting what you should get out of that.

This applies to contractors, employees, subscriptions, and any people providing services to you. Any outgoings.

Just some general thoughts on how you may optimise efficiencies:
• Ensure your team members are well trained to reduce the need for rework, or generating unhappy clients.
• If you have a team on the road, make sure you schedule jobs so it reduces the time they are sitting in cars travelling between work sites. There is software that can optimise this, and it should be cheaper than paying for people to sit half the day in a car.
• Consider getting rid of the employee who’s not pulling their weight.
• Review all your expenses to make sure you’re not paying any unnecessary money to anyone. Even cancel services that you can do without that won’t have a big impact on the business.
• Make sure your senior people aren’t doing junior work where possible.
• Do you have extra vehicles that are hardly used?

Hopefully this has jogged some ideas for you.

Five: Keep an eye on stock levels

This one is a similar to Point Four about efficiency.

Stock and materials on a shop’s shelves or in storage are just like cash that not is in a bank account. Make sure you don’t have excessive amounts of stock lying around, or you have a shop full of stuff that will take you ages to sell.

You have to balance this with bulk discounts for large amounts of stock. But my recommendation is to find the sweet spot, and stock the correct number of weeks’ worth of materials and stock you need to make sure you don’t run out.

I hope these tips have helped spur some ideas on ways you can optimise and improve your business, particularly around the financial and cash flow aspects.

If you need assistance with any aspect of what I’ve mentioned above, please feel free to reach out to our team at Inspire Accountants and see how we can be of assistance.