Businesses not out of woods despite increasing optimism: HLB Mann Judd Sydney

Financial services ombudsman Shane Tregillis at 2013 New Year kick-off
January 24, 2013
Benefits of MySuper worth considering: HLB Mann Judd Sydney
January 29, 2013

While there are signs for optimism in the economy – especially for investors – owners and managers of businesses should still be cautious in their outlook, says Todd Gammel, business recovery and insolvency director at HLB Mann Judd Sydney.

“There are still a number of warning signs for businesses that need to be heeded, and even if there is an economic recovery, it won’t happen immediately and for many businesses a difficult trading environment will continue in 2013.

“Indeed, there is a temptation for business owners and managers of businesses that have current operating difficulties to hope that any problems will go away, and that things will somehow turn out OK.

“But the best thing they can do is face reality, acknowledge that they have a problem, and get help before it is too late.

“Businesses that do this stand a much better chance of survival than those that bury their heads in the sand.

“It is possible to turn a business around provided prompt action is taken,” Mr Gammel said

He said there are two main indicators that some businesses will struggle in 2013.

“A number of businesses failed and entered into administration, receivership or liquidation in 2012 and this doesn’t simply stop overnight – so we can expect more to follow.

“It also means there are necessary sales of distressed inventory and assets which will affect other businesses for some time.”

Mr Gammel also pointed to the number of job losses in large companies still being announced, which will affect consumer spending, and indicates that many businesses are still cutting costs to match a reduction in turnover.

“Job reductions in larger businesses may also result in further jobs losses down the line or business closure in some cases.”

According to Mr Gammel we will see a number of drivers of insolvency in 2013, including:

  • The Australian Taxation Office (ATO) aggressively pursuing outstanding amounts owing
  • Directors appointing administrators or liquidators to avoid personal liability for employer superannuation entitlements which have not been paid within three months of their due date
  • Directors being unable to sell businesses for more than the amounts owing to creditors, leading to a sale and an insolvency appointment due to the shortfall to creditors or a closure of the business if unsalable
  • Businesses that have private equity investments which is part of closed funds where further funding is not being provided
  • Businesses where equity has diminished to nil over recent difficult trading years and  further funding is not available from shareholders or financiers
  • Industry restructure and changes to competition i.e. traditional retail, construction, mining services, hospitality and manufacturing, where affected businesses are not responding to change
  • Increasing inventory and/or stagnant sales and accumulating bad debts.

“If any of these scenarios sound as if they affect their business, owners and managers should talk to an adviser or accountant immediately.

“Often establishing a clear plan, taking decisive action and keeping key stakeholders onside can save a business that was otherwise destined for insolvency,” says Mr Gammel.

He adds that some of the steps that can be taken to avoid insolvency or enforced restructure include:

  • Constant management of working capital and early identification of any working capital issues
  • Development of a restructure plan and financial forecast to be provided to relevant stakeholders i.e. financiers, shareholders and management. The plan should be conservative and achievable to ensure there are minimal “surprises” through the process
  • Consideration of an expert to conduct a solvency review, including a review of the restructure plan and consideration of options available. Options may include an asset sale, provision of further security, formal insolvency appointment or merger with another company.

“Financiers are often willing to consider proposals and assess their position when given the opportunity,” Mr Gammel said.

“If insufficient detail regarding a plan or minimal time is provided, it is likely that most financiers will move to protect their position and recover the amount owing.

“The ATO also needs to be managed on a similar basis to financiers to agree an achievable payment plan where required,” Mr Gammel said.

HLB Mann Judd Sydney is a firm of accountants and business and financial advisers, and part of the HLB Mann Judd Australasian Association.

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For more information please contact:

Todd Gammel – Phone: 02 9020 4014

29 January 2013