April 2014 Issue 92

Don’t commit business infanticide – set up well!

B2B Editor27 March 2014

Don’t commit business infanticide – set up well!

It is commonly understood that over 80% of businesses fail in their first 12 months of operation. A further 50% fail within the next 12 months. Is this symptomatic of business operators not being good at what they do? Not necessarily. What those statistics do not reveal is that often the idea that spawned the business is insufficiently supported by good systems, controls and processes to give the idea the best possible chance of flourishing.

Data collected by ASIC regarding corporate insolvencies over the past 12 months indicates that the main drivers of insolvencies continue to follow the post-GFC trend – being intrinsic rather than extrinsic – poor cash flow management, poor financial management and poor strategic management.

Businesses that are exposed to volatile revenue patterns in the current economic climate must ensure their fundamentals remain strong, especially those in their infancy. Poor cash flow management during downward cycles can lead to illiquidity, placing pressure on internal sources of funding. Strong balance sheets continue to yield insolvencies due to the inability to generate sufficient cash to pay debts as and when they fall due. Financial agility in business cannot be overlooked or underestimated.

In the coming months, as the extent of the ‘fiscal restraint’ emerging from the federal budget becomes clearer, the local economic landscape may well contract further. This should lead savvy business operators to re-adjust their cash flow forecasts. Therefore, now is an opportune time to prepare sensitivity analyses around differing sets of assumptions regarding revenues and costs. To delay this process may well prove too late to implement strategies for recovery if the worst befalls you.

The suite of tools available to an insolvency practitioner to apply to the recovery or resurrection of a business, have the greatest effect at the point nearest to the emergence of the problem. The longer the period of procrastination before seeking specialist advice, the more diminished will be the effect of any business rescue plan, as will the suite of options available. Indeed, those that delay the longest may find that the remaining options are less palatable than they might wish and that any value has long since been eroded.

With the resources and skills to implement successful business recovery strategies, Vincents can assist you to diagnose and treat failing elements of your business to put in place measures to guard against worst case outcomes ensuring your infant business grows to maturity.