Small businesses have been doing it tough these past few years, particularly post-pandemic. It is more important than ever before for directors to remain alert and pragmatic when facing financial difficulties. The following article contains 3 critical signs that a small business may be insolvent, and the appropriate actions directors can take.
- Continuing trading losses
Trading losses are a telltale sign of financial difficulty. It is common for new, unestablished businesses to temporarily experience losses, relying instead on savings or a loan to cover business expenses until income picks up. Trading losses for an established business commonly occur due to poor internal structure (mismanagement) or external factors, caused by challenging economic conditions.
Action
It may be possible to reduce the scale of your operations or cut back on the suboptimal and underperforming parts of your operation. This is best done with assistance from a qualified professional.
- Overdue tax debt
Overdue tax debt is another sign a small business may be insolvent.
Action
If you are falling behind on your tax debt, the best approach is to keep up to date on lodgments (tax returns and activity statements). If you are unable to pay, proactive communication with the ATO is critical, and lodgments demonstrate transparency. This can also protect avenues for restructuring.
- Pressure from creditors
Another telltale sign of small business insolvency is pressure from creditors. This can include legal action, suppliers placing your business on COD (cash on delivery), or creditors seeking payment arrangements. These pressures sometimes drive the director to organise payment to creditors outside of common business or industry practices.
Action
Remaining proactive and communicative is key for effectively dealing with creditor pressure. Avoidance will only increase the risk of further legal complications, business closure or even personal liability.
The takeaway
Whilst insolvency is a scary prospect, businesses often don’t realise the avenues still available to them. Turnaround is possible when directors remain proactive and seek advice early on, from a qualified professional.
