In brief - Take heed of warning signs of declining financial
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
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
This newsletter includes links to recent documents relating to superannuation, funds management & financial services.
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