Take precautions to avoid bankruptcy

THE impact of a bankruptcy can be devastating, not only for the business owner but also others associated with the business – staff lose their jobs and often their entitlements, customers lose deposits, and suppliers are left as unsecured creditors. 

There are many lessons we can learn to avoid bankruptcy, and the stigma and financial disaster that accompany it.

Here are some lessons I have learned working with business over the past 27 years.

Divorce

One of the quickest ways to reduce your assets is to get divorced. What’s often forgotten is the mental impact that divorce has on all parties and the effect this can have on the operational efficiency of a business.

The power of the Family Court can have a massive impact on the ability of a business to continue to trade. The court can instruct that properties used as security for bank funding be removed, leaving the business with no funding lines.  

If you are considering divorce it’s important to understand the effect it could have on your mental state, your ability to run the business, and on the financial health of your business. 

Stick to your knitting

How many times have you seen a successful businessperson buy a cafe or restaurant? How romantic, how exciting; it would be great for business meetings and provide a fantastic cash flow.

Diversifying into an area that is not familiar or within which you have no expertise is fraught with danger. The number of perfectly good businesses that go bankrupt supporting diversification into other markets is enormous. You need to know what you are doing, or employ someone who does.     

Profit versus cash

In cash-based businesses, money in less money out gives you a profit or loss. However with accrual accounting, invoices issued less bills received gives you a profit or loss. The first scenario will be represented by the cash in your bank account; the second will not.

You must understand that cash is king and a business is quite capable of going bankrupt making an accounting profit. What is the cash flow position of your business and do you have sufficient working capital to survive? 

Pay your taxes

Fail to pay your taxes and watch how fast your business can fail. The tax department does not suffer fools and has the ‘teeth’ to match its ‘bark’. Ignorance in relation to tax liabilities is no defence and the courts are filled with the stories of people who thought otherwise. 

Understand your tax position, employ consultants who understand tax law and your business and from whom you can get quality timely advice. 

Mixing friends/family with business

In theatre you are told to never work with animals and children; in business never do business with friends and family. Too often we think it will be fun to start a venture with a family member or a friend, and so often it ends in tears.

Getting on with someone does not make them a good business partner. Look at their skills, experience and what they can add to the business. Discuss all aspects of the venture, including the operational and financial aspects and your vision for the future.

When dealing with friends and family it is even more important that you document everything, ensuring agreements are put in place to cover all eventualities. This will ensure that your personal relationship will have a better chance of surviving the unexpected.  

Force majeure

In business what could go wrong may go wrong. In recent times Australia has been faced with bushfire, floods, power outages and the GFC. Any one of these events could be dramatic enough to send a business to the wall.

The only answer is to be fully insured and have systems and procedures documented to cover as many eventualities as you can imagine. Many of the businesses that have faced the events of the past few years have had adequate insurance and lived to fight another day. Do you have adequate insurance?

Bankruptcy is not a means to avoid debt. It is a serious event that can impact on your life and the lives of those around you.

Paul Rowe is chief executive of Razor Commercial Finance. 
Contact Paul on prowe@razorbs.com.au | 0406 800 928.