ASIC’s insolvency statistics show that business bankruptcies are up 39% from the previous financial year. Construction, hospitality and the food service industries were the most impacted.

In 2023-24, restructuring appointments increased by more than 200%. Small business restructuring is a way for eligible companies (those whose liabilities are less than $1 million and other criteria) to keep control of their business while they develop a plan to restructure. A restructuring specialist will help you to develop a plan for restructuring your business with creditors.

As of 30 June 2024, out of the 573 companies which had begun restructuring after 1 Jan 2021, 89.4% were still registered. 5.4% went into liquidation and 5.2% deregistered.

Michelle Bull, in the Reserve Bank of Australia’s latest statement, stated that “there are also some signs the business sector is facing a little pressure and that the outlook for the business is not as bright as it used to be.” Productivity has also been lagging.

Business owners need to know their numbers in order to manage and identify problems before they become out of control. It’s important to identify the main drivers in your business. These are the factors that will determine whether you succeed or fail.

Insolvency is when a business cannot pay its bills when they are due.

Three main reasons for failure of companies are:

• Poor Management
• Cash flow problems or excessive cash usage
• Trading losses

Business owners could easily ignore the warning signs and hope that things will improve if you just get through a slump. Common problem areas include:

• Performance below budget is significant
• Significant increases in fixed costs, but no increase in revenue – Fixed costs are expenses that you incur regardless of the level of business activity. Fixed costs have a direct impact on profitability when they increase. Your profitability could be affected if your fixed costs increase, for example, if you hire more staff, buy more equipment or lease more space.
• Gross profit margins are falling – The gross profit margin is your margin between sales and cost of goods. Each dollar in gross profits you lose is a dollar taken off your bottom-line.
• Sales are declining – This will have an impact on your business. It can reduce profit and slow down growth.
• You are not paying your creditors in a timely manner, even though you have good sales.
• Spending more than your cashflow makes you pay for today’s expenditures with tomorrow’s earnings.
• Poor financial reporting systems: Driving your business blindfolded.
• Growing too fast – Your business is making more sales than it can handle.
• Significant bad debts, or “dead” stock: Customers who don’t pay or stock you can’t move.

If you are noticing some of these signs in your business, please do not hesitate to speak to the business consultants at Bates Cosgrave.