In our last newsletter, Andrew wrote an article regarding the likelihood of insolvencies growing and the level of enquiries picking up generally for the insolvency and restructuring industry.
Since that article, we have seen further evidence that the insolvency tsunami is about to commence, with insolvency appointments in England and Wales at 60-year highs. The Australian Taxation Office coming out in recent days and announcing that they are issuing approximately 30 to 40 direct penalty notices each day, and a federal election that will see, irrespective of who leads the country, a natural pick up in tax enforcement post-election.
Combined with all these recent observations, the almost perfect storm of rising interest rates, increased cost of living, higher fuel costs, supply chain issues, staff shortages and ongoing impact from Covid around the health and well-being of the population. It is hard to see how Australia will not follow suit as we have seen in the United Kingdom.
So how do you as an advisor ensure that your clients are ready to weather this storm?
In recent years, the fundamentals of advising the client in financial distress have not changed dramatically. As a result, a focus on cashflow and working capital is always front and centre of close monitoring. Ask the following questions?
- What is the cash flow?
- How much available cash does the business presently have?
- What are the cash needs of your client over the coming 2 years?
- What is the aging of creditors?
- How collectible are your debtors?
- What is the customer base's current makeup and their ability to pay their bills within terms?
- What industry does your client operate out of?
- Is your client experiencing ongoing supply chain issues?
- What is the impact to the business?
- What are the current terms of their finance facilities ad are they expiring in the next 12 months?
- Is your client experiencing staff shortages?
- What is the outlook for your client's industry?
- Is your client's statutory obligations up-to-date?
- Is your client currently in a payment plan and complying with them?
- What does the pipeline or go forward revenue look like for your client's business?
All these questions suggest that advisors should now proactively analyse their client's financial position.
History tends to suggest that the Australian economy follows the economies of the USA and United Kingdom. In recent times the severity of financial distress in Australia has not been as serious as what has been witnessed in other countries however, with the expectation of multiple interest rate rises and debate as to whether the Reserve Bank of Australia has left the interest rate rises too late thereby causing out of control inflation in the economy, it is quite possible that we may be staring down a correction or even a large recession that we have not seen for decades.
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.