Business viability: options for SMEs in financial difficulty

AUTHOR

No SME business wants to suffer financial difficulty. We talk to Travis Kukura, Principal, Restructuring & Recovery in the Perth office of RSM Australia, about how to recognise signs that point to business unviability, and options for business owners to turn things around.

In Australia’s slow-growth economy, what’s the current state of play for businesses?

While we are in challenging economic conditions, it’s not all doom and gloom. On one hand, we've got businesses and people who continue to make money - and good money, too. business viability

On the other hand, businesses are doing it tough. I met recently with the building and construction industry, and certainly to many it feels like doom and gloom - it seems like every day they hear about another building company going down.

What are business owners’ major challenges and concerns?

Whilst the construction industry is getting the most attention, there are businesses across all types of industries that are experiencing a squeeze on their cashflow. Inflation is relevant, and it’s affecting things like the cost of materials. Interest rates are having an impact, but there is a lag time before these rate changes will have their full effect in the economy.

We’re still seeing significant impacts from the covid period. Many fixed-price contracts, labour shortages and supply chain issues. A big problem is tax liabilities that haven't been paid. That’s prevalent because the helping hands - the stimulus and other measures - have all been withdrawn and now the ATO is starting recovery activity. Tax debt is in the order of $68 billion - the ATO will actively recoup that.

The challenges around tax debt, staff shortages, supply chain issues, price increases, cost-of-living expenses, interest rate rises and so on are all still having an impact on businesses at different levels. It’s never just one factor.

Are these problems leading to SME businesses becoming unviable?

We are seeing an increase in the number of wind-up applications post covid, no doubt.

Regarding viability, there are plenty of headwinds out there at the moment - but being proactive can make all the difference. You can ask RSM to do a business health check - an analysis of your financial position - to see how those headwinds are impacting the business.

For business owners who are being proactive, what are the warning signs that their business could become unviable? options for smes in financial difficulty

It's a long list. But there are a number of key indicators. The most common of these is being unable to meet statutory obligations: your taxes and superannuation. Next, struggles to pay your staff and even yourself – which is a sign that there is pressure on the cash of the business. Is the business profitable? Are you conducting variance analysis on your monthly reporting to identify any trends or outliers? Are your finance facilities at their limit? Are you able to make your finance repayments? Working capital shortages can be fatal.

Another good thing to ask is: are you always waiting for the next big job or contract to come in? When it does come in, is it actually a profitable contract?

We can break that down into your obligations to pay the bills, servicing your debt, and then your people.

That’s right. All of it puts pressure on cashflow.

Let’s say you’ve been through that health check and identified warning signs. Is insolvency inevitable?

Absolutely not. And the sooner you start getting proactive about it, the better.

We say it all the time: the earlier you act, the better. It puts more options back on the table.

A lot of people come in for just one meeting, and we never see them again - that’s a good result. They get new insight, take action and get back on track.

At the other end of the spectrum, we end up engaged as a liquidator to shut down the business.

But a lot can happen between those two outcomes, can’t it?

Getting that professional advice gives you options. Working with an expert to develop a plan can absolutely turn things around.

Let me give you an example. One of the RSM teams is working with a business that has a significant presence in its local community. Some concerns have been raised about its financial position, so RSM is conducting a financial review with a view to making recommendations regarding operational issues that could be restructured and improved. Our aim is to develop a plan to prevent the failure of this business, which would have huge ramifications for the local economy.

How do SMEs in financial difficulty access those options? options for businesses in financial difficulty

100% it’s picking up the phone and calling RSM for a free, initial consultation.

The most important thing is recognising a problem and asking for help. It’s human nature to say, “I can sort it out myself.” But it’s heart-breaking when people come to us too late. A better outcome is when they come in early and develop a plan that gives them certainty about moving forward.

To be in a position to recognise that there’s a problem, though, you want to have the holy trinity of financial information available to you every month: your cashflow statement, profit and loss statement, and balance sheet. It's very hard to understand what's going on in your business without that key financial data.

You might be worried about the cost of the advice. The costs of a formal engagement depend on the type of engagements and the circumstances involved but seeking this expert advice early means that this initial investment should be a lot less than the overall financial impact on the business owner. The emotional toll of winding up a business can be even more costly. That’s what we want to help you avoid.

It doesn’t cost anything to pick up the phone to RSM and have an initial meeting.