Since at least the 2005 financial year, the Australian
Securities and Investments Commission (ASIC) has tracked the most
common causes of business failure.
The statistics reveal the circumstances commonly shared by
companies that collapse:
inadequate cash flow or high cash use
poor strategic management
poor financial control
poor management of accounts receivable
other contributing factors.
The common link
It's worth noting how these causes play out in real business
situations. In each case, almost every factor that contributes to
business failure is associated with inadequate information
management and record keeping.
Too many businesses face financial distress with owners not
comprehending the core reasons. Often, had accurate financial data
been collected and reported to the business owner, they may have
been better placed to evaluate the options available to the
business and the potential for turning around business
In one example, a review of detailed financial records (had they
been available) may have shown a business owner that one of their
product lines was generating excessive trading losses and draining
the business's cash. The owner may then have been able to
simply remove the product line from the business's
The value of financial record-keeping
Comprehensive, accurate financial information management is
vital to businesses for three core reasons:
Support for business decision-making
Marketing the business to financiers.
The most fundamental reason that businesses should generate and
maintain accurate financial information is the need to comply with
relevant regulations and legislation.
The Corporations Act includes a statutory requirement for
companies to prepare, maintain and audit 'true and fair'
written financial records that accurately reflect and explain the
business's transactions, financial position and
Taxation legislation also requires businesses to maintain
Support for decision-making
The ready availability of comprehensive, precise information is
also crucial to decision-making processes at all levels of a
For example, accurate records about inventory levels, 'days
in inventory', 'debtor days' and 'creditor
days' reveals information about business performance that can
be used to improve business operations.
The business owner can find answers to key performance
questions. For instance, is it time to replenish stock? Are debtors
paying on time? Is the business taking advantage of trade credit
available to it?
Marketing to financiers
In addition, financiers require information (including both
historical financial results and forecasts) when evaluating finance
applications for new loans, existing loan compliance and
This may occur at any stage of the business life cycle and may
be part of a financier's routine quarterly or six-monthly
Frequency and timeliness
Many companies only review their financial data once at the
conclusion of each financial year. However, a month can be a long
time in business.
I urge company directors and managers to consider the benefits
of implementing more frequent reporting cycles on both a historical
and forward-looking basis.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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