The Warning Signs of Business Failure - AMPAC Debt Recovery (2024)

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The Building Industry Credit Bureau (BICB) forecasts around 1,350 insolvencies in the construction sector for 2022. This is a sobering number, and a reminder for all credit professionals to remain alert to the warning signs of failure, no matter what industry they trade in.

So, which are the main areas within a business that can display signs of weakness or distress and lead to insolvency?

  • Three key arrears of a business that must be well managed:
  1. Finance & administration
  2. Operations
  3. Sales & Marketing

All businesses must be reasonably strong in each of these three areas, and not fatally weak in any one. In other words, a business may be strong in its sales and marketing and its operational management, but weak in its finance and administration. This is a business that is susceptible to failure. Alternatively, the business may be strong in its finance and administration and its operations, but is weak in its sales and marketing, then this business is also at risk of failure.

The Warning Signs of Business Failure - AMPAC Debt Recovery (1)

  • Why do businesses fail?

The primary reason for business failure in most industries is a lack of financial management. Poor cash flow and inadequate working capital, often compounded by too much debt (or over-gearing) is evident in most business failures.

Of course there are other reasons too, such as:

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  • People – a lack of experience. Just because an individual was successful as a manager or employee in one business, does not mean they have the skill or experience to run an entire enterprise. In the case of a small business, the owner is often responsible for HR, finance, administration, sales and marketing and everything else that crops up out of the blue.
  • Product – poor product selection and marketing often results in poor sales and contributes towards financial stress.
  • Adverse trading or economic conditions place unforeseen pressure on an organisation that does not have the financial strength to weather the ups and downs.
  • Rapid growth coupled with inadequate available funding. Retail and hospitality are key industries to keep an eye on for this common problem. Just because one or two locations perform well, does not mean that this successful formula will repeat itself across many locations. Strong leadership, experience, knowledge and deep pockets are what is required to fund rapid growth.
  • Loss of one or more key customers is also a common reason for failure. Any organisation that is almost completely reliant on one or two clients or contracts should be monitored closely.
  • Management disputes are also a common reason for failure. In particular disputes between the directors or shareholders can ruin an otherwise good operation.
  • Things to look out for:
  • Deteriorating payment trends are a strong indication that all is not well in the critical area of financial management.
  • Irregular payments and repeated requests for extra time to pay also indicate a strained cash flow and inadequate working capital.
  • Broken promises. When a customer requests additional time to pay, and you have agreed to an extension, be sure to follow up immediately if the payment is not received. If two or more broken promises are received, consider escalating the debt to your collection agency.
  • Avoidance. When your calls and emails requesting payment of an account are not returned promptly, you are right to feel uneasy.
  • Change in ownership. Whilst a change in ownership of a business is not necessarily a sign of potential failure, it is important that new credit documentation is obtained to secure your risk.
  • Depleted stock levels in a wholesale or retail operation may also point you to cash flow problems.
  • High staff turnover can also be a sign of deeper problems within an organisation.

With the end of the 2022 financial year fast approaching, it is a good time to review your non-performing debtors and consider which of those should be escalated to debt recovery.

If we can assist with any aspect of your credit risk management, please call AMPAC on 1300 426 722 or email us at sales@4ampac.com.au.

CONTACT US NOW

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Your Details

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The Warning Signs of Business Failure - AMPAC Debt Recovery (2024)
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