WHY DOES A BUSINESS FAIL

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					STATUTORY                                         BOOKKEEPING                                       THE INDIVIDUAL
RESPONSIBILITIES                                  It is essential as part of business survival to   When trading in a partnership or as a sole
                                                  keep adequate books and records.                  trader, you are personally liable for all of
In holding a position within a corporate                                                            the debts that the business incurs, and
structure - as a Director or Company              This obligation to keep records of financial      accordingly any personal assets that you have
Secretary or deemed officer - you are             transactions extends to transactions              are at risk in the event of business failure.
considered by the Courts to be totally            undertaken as Trustee of a Trust.
conversant with the responsibilities which                                                          PATTISONS provides advice on:
that position holds, as outlined under the
Corporations Act, Income Tax Assessment           THE CORPORATE
Act or other legislation relevant to your                                                           • Business Restructuring
                                                  ENTITY AND INSOLVENT




                                                                                                                                                                                                                                                              Pattisons
business. The fact that you hold this position                                                      • Company Restructuring
and the work is conducted by a person other       TRADING
than you does not exempt you from your                                                              • Corporate Insolvency
responsibilities.                                 It is important if you are a Director,            • Credit Control Procedures
                                                  that you are well aware of the provisions
                                                                                                    • Creditors Meeting
CONSEQUENCES OF                                   of the Corporations Act. In particular,
                                                  a Director’s duty or obligation to prevent        • Creditors Rights
INSOLVENT TRADING                                 insolvent trading by a company is detailed
                                                  in the Corporations Act.                          • Debt Recovery
The consequences of insolvent trading for                                                           • Debt Security                                   Pattison Consulting Pty Ltd
directors may give rise to the director being
exposed to civil & pecuniary penalties.                                                             • Dispute Resolution                              ABN 24 434 194 066
                                                                                                                                                      ACN 079 638 501
                                                                                                                                                                                                                                                                                                          WHY DOES A BUSINESS FAIL?
Also, where the company acted as trustee for                                                        • Forensic Accounting
a trust, directors may be liable for any unpaid
debts where the right of indemnity from the                                                         • Insolvency Administrations
trust is deficient.                                                                                 • Litigation Support                            • Level 14           • Level 6           • Level 2             • Level 57           • Level 30
                                                                                                                                                      461 Bourke Street    329 Thomas Street   83 Moorabool Street   MLC Centre           AMP Place
                                                                                                    • Personal Insolvency
                                                                                                                                                      Melbourne Vic 3000   Dandenong Vic 3175 Geelong Vic 3220       Martin Place         10 Eagle Street     There are three common and important principal
                                                                                                    • Pre Lending Reviews                             Tel 03 9600 4611     Tel 03 9792 5611    Tel 03 5222 7422      Sydney NSW 2000      Brisbane QLD 4000   reasons for a business failing to succeed:
                                                                                                    • Problem Debt Reviews                            Fax 03 9602 5007     Fax 03 9792 5822    Fax 03 5222 5822      Tel 02 9236 7319     Tel 07 3303 0295
                                                                                                    • Problem Loan Reviews                            DX 562 Melbourne     DX 17527 Dandenong DX 22028 Geelong       Fax 02 9236 7320     Fax 07 3303 0296    • Poor Management
                                                                                                                                                                                                                                                              • Poor Liquidity
                                                                                                                                                                                                                                                              • Unprofitable Trading
                                                                                                                                                                                              • www.pattisons.com.au
                                                                                                                                                                                              • pattisons@pattisons.com.au




Pattisons
INTRODUCTION                                   REASONS FOR A                                Internal Factors Leading                      POOR LIQUIDITY                                  Shareholder Funding
                                               FAILING BUSINESS                             to Poor Management                                                                                                                                Proprietor Funding                                 Asset Realisations                                Creditor Funding                                 REMEDIES FOR A
Pattisons is often requested to assess                                                                                                    Sources of funds available to contribute to     Shareholder funding may result from issued
a business when it is unable to pay its                                                     Understanding that external factors cannot    the liquidity of the business are:              capital or profits retained. The level of capital   This type of funding is provided by a cash         Idle assets may cause a deterioration of the      Many businesses rely heavily on the support      FAILING BUSINESS
debts as and when they fall due.               • Poor Management                            be controlled, but must be managed                                                            funding needs to be sufficient to support the       injection from the proprietor of the business.     profitability or liquidity of the business, and   of their trade creditors to finance their
                                                                                            correctly, the Director or Proprietor needs                                                   activity levels of the business.                                                                       as such should be quickly realised.               business activities. It is necessary to ensure
                                               • Poor Liquidity                                                                           • Funds from shareholders in respect                                                                                                                                                                                                                      • Acquire the services of a good
At this stage, it may be too late to                                                        to understand the following internal                                                                                                              Insufficient initial or ongoing cash resources                                                       that agreed credit terms are maintained.
                                                                                                                                            of share issues and profits retained in the   A company needs to maintain its liquidity                                                                                                                                                                   accountant/solicitor
implement corrective strategies, resulting     • Unprofitable Trading                       factors that may affect the success or                                                                                                            to finance establishment costs, including          Proper stock forecasting and tight controls
                                                                                                                                            business (“Shareholder funding”)              requirements from its own resources and if
in Bankruptcy, Liquidation, Voluntary                                                       failure of the business(es):                                                                                                                      plant and equipment purchasing, and the            over stock purchasing and rotation overcome       Issues involving creditor funding include        • Analyse variations between budget and
Administration, Deed of Company                                                                                                                                                           necessary profits retained in the business.
Arrangement or Receivership.                   POOR MANAGEMENT                                                                            • Funds from proprietors in respect of
                                                                                                                                                                                                                                              inability to finance projects prior to receiving
                                                                                                                                                                                                                                              any funds from customers/clients, may cause
                                                                                                                                                                                                                                                                                                 idle stock asset build up.                        the overspending or incorrect purchasing of
                                                                                                                                                                                                                                                                                                                                                   items. This can lead to idle stocks or costs
                                                                                                                                                                                                                                                                                                                                                                                                      actual costs
                                                                                            • Budgeting and forecasting procedures          capital injected (“Proprietor funding”)       A company’s profitability is affected by its                                                                                                                                                              • Be positive in advising creditors of
                                                                                                                                                                                                                                              a business to fail before it has really become     Inventory problems may not only arise in          that may not be able to be absorbed by the
By seeking early assistance, strategies        Good management of a business is an                                                                                                        margins, asset utilisation and gearing.
                                                                                            • Changing consumer demands                                                                                                                       operative and self funding.                        relation to actual purchases of goods or          business. As a result profits fall, creating a     current cash flow or liquidity
may be implemented to save the                 indication of its ability to identify real
                                                                                                                                          • Asset realisations i.e. collection of                                                                                                                materials to be used on jobs, but also the        liquidity problem.                                 problems, keeping creditors advised of
business, including:                           or potential problems, and to take the       • Costing/quoting procedures                                                                  Low Gearing
                                                                                                                                            book debts or disposal of assets                                                                                                                     amounts outstanding for work in progress.                                                            the circumstances
                                               necessary corrective actions.
                                                                                            • Credit control                                (“Asset realisations”)                                                                                                                               Progress payments due for work done should
                                                                                                                                                                                          A low gearing ratio occurs where there is a                                                            be submitted as soon as practicable to prevent                                                     • Constantly review costs and arrange
• Accurate costings                            Poor management may arise due to the         • Financial/accounting knowledge                                                              low proportion of funds provided by outside                                                            funds from being withheld unnecessarily.                                                             to have financial figures prepared
• Expenditure Review                           lack of knowledge and expertise in a                                                       • The supply of goods from creditors            lenders compared to shareholder funds.
                                                                                            • Holding costs                                                                                                                                                                                                                                                                                           regularly (at least quarterly), to assist you
                                               specialist area of the business.                                                             prior to any payments being made
• Refinancing Proposals                                                                                                                                                                                                                                                                          Book debt collection should be tightly                                                               in management decisions
                                                                                            • Increased unserviceable debt                  (“Creditor funding”)                          If the business does not have a high debt                                                              controlled and their ageing limited, in the
• Suitable restructuring of the business       Poor management may be classified as                                                                                                       activity, these businesses have a high capacity                                                                                                                                                           • Contact your Industry Association in
                                                                                            • Knowledge of statutory regulations                                                                                                                                                                 event that the customer breaches the agreed
                                               either External or Internal factors.                                                                                                       to absorb problems which may arise e.g. a
  organisation                                                                                                                                                                                                                                                                                   credit terms, strict credit control procedures                                                       respect of questions that you may have.
                                                                                            • Management salary levels                                                                    bad debt write-off or seasonal downturn in the                                                         should be enforced.
                                               External Factors Leading                                                                                                                   industry.                                                                                                                                                                                                 • Keep up to date with trends and
A typical example of poor management                                                        • Margins
                                                                                                                                                                                                                                                                                                                                                                                                      market demands by attending trade
or lack of business skills, is the confusion   to Poor Management                           • Marketing strategies for products/                                                                                                                                                                                                                                                                      nights, industry seminars, etc.
drawn between cash flow and profit eg.
some Directors or Proprietors become           The following list outlines factors beyond       services                                                                                  High Gearing                                                                                                                                                                                              • Maintain and review cash flow projections
overawed at a substantial bank balance,        the control of a Director or a Proprietor
not fully understanding that the funds                                                      • Need for adequate insurance                                                                                                                                                                                                                                                                           • Obtain the assistance of an industry
                                               that must be managed correctly to ensure                                                                                                   A high gearing ratio occurs when there is a
are required to pay creditors e.g. 7, 30       business survival:                           • Need to be able to replace terminally                                                       high proportion of funds provided by outside                                                                                                                                                                specialist when necessary, to complete a
or 60 days.                                                                                                                                                                               lenders compared to shareholders funds,                                                                                                                                                                     contract or to resolve a current problem
                                                                                                ill or deceased senior staff
                                                                                                                                                                                          i.e. the company has a high debt servicing
Seeing such large sums in the bank             • Changes to the law                         • No succession planning                                                                      commitment.                                                                                                                                                                                               • Regularly prepare budgeted profit and
account they tend to dabble with those                                                                                                                                                                                                                                                                                                                                                                loss statements
                                               • Family reasons                             • Poor cash flow
funds for their own benefit or buy capital                                                                                                                                                Lack of profits or a diminishing level of                                                                                                                                                                 • Seek the assistance of your professional
assets without providing for creditors’        • Government restrictions                    • Purchasing practices                                                                        activity may result in a reduced capacity to
                                                                                                                                                                                                                                                                                                                                                                                                      advisors, consultants, accountants,
outstanding accounts. This activity creates    • High borrowing costs                                                                                                                     absorb any liquidity problems, which may
liquidity problems and subsequently,                                                        • Record keeping                                                                                                                                                                                                                                                                                          solicitors, industry experts or insolvency
                                                                                                                                                                                          arise.
failure if it is not properly controlled.      • Inflation                                  • Site control                                                                                                                                                                                                                                                                                            practitioners
                                               • Interest rates                                                                                                                           A highly geared company needs to ensure that                                                                                                                                                              • Use prompt, corrective action in order
                                                                                            • Supervision of staff and
                                                                                                                                                                                          it does not have idle assets (e.g. stocks and
                                               • Market forces                                                                                                                                                                                                                                                                                                                                        to prevent you from defaulting under your
                                                                                                sub-contractors                                                                           book debts), in order to meet debt repayments




                                                                                                                                                                                                       Responsibility
                                                                                                                                                                                          out of its own cash resources as and when                                                                                                                                                                   contracts
                                               • Matrimonial disputes                       • Staff training
                                                                                                                                                                                          they fall due.
                                               • Negligent advice                           • Stock control
                                               • Poor economic conditions                   • Unsatisfied demands for payment
                                               • Poor external advisors




                                                                                                                                                                                                                                                                                                 Liability
                                               • Shifting populations
                                               • Taxation
                                               • Unions




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