Going broke – some statistics and some reasons…

Peter Cramer

The following draws upon an article from Worrells, (a firm devoted to dealing with insolvencies both before and after the event) and personal experience.

Are economic conditions to blame?

The September quarter of Australian Financial Security Authority (AFSA) personal insolvency statistics are out, and the trends of 2017 continue. Total personal insolvencies are up by 8% compared to a year ago, and debt agreements continue their significant growth. Debt agreements reached a record high of 3,885 and increased to 47.4% of total personal insolvencies. Bankruptcy increased just 0.1% for the quarter.

In September, AFSA also released annual data about personal insolvency causes for the 2016-17 year. These provide some interesting insights into what leads to personal insolvency.

Business related personal insolvencies

Just 16.1% of debtors declare bankruptcy for business related reasons, with economic conditions most often cited as the main reason. It is worth noting that economic conditions have been the most common business related cause of debtors entering personal insolvencies every year since the 2007–08 year.

Whilst many failed businesses blame ‘economic conditions’ as the reason for failure (‘going broke’) our experience tells us (and that of most insolvency firms who take over in order to sort the issues out and try to recover funds for the creditors or investors) the primary reason is a lack of business acumen and a failure to keep proper records.

Too many businesses fail because the people going into business just don’t know about running a business and once they are running it, don’t recognise the warning signs of imminent failure or refuse to listen to, or don’t seek the advice of, professional advisers.

Non-business related personal insolvencies

The remainder of debtors declare bankruptcy for non-business related reasons. In this area, two factors are overwhelmingly dominant—excessive use of credit, and unemployment.

Another factor – which is related to the above, is the lack of ‘working capital’.  Working capital is the amount of cash injected into the business from day one that is available to pay the wages, the rent, to buy and replenish stock, to cover the fact that the money from your credit sales takes time to turn up (eg debtors may take 30 days or more to pay you but you have to pay for the stock sold in 14 days) and to cover drawings and private payments.

So – what should you do to ensure you are not the one who ‘goes broke’ next?

  1. Seek, listen and act on professional advice before you buy a business or as part of considering setting one up. Continue to seek advice thereafter.
  2. Make sure you have more than enough cash funds to run the business and to cover periods of below budget sales – ie to carry you through the tough times.
  3. If you think using credit cards will help you – forget it!
  4. Prepare a budget and a business plan before you start. If you can’t or have no idea of what the figures will look like – you shouldn’t be going into business.
  5. Work out who your customers will be – what are you selling and who will be buying – then prepare a marketing plan to make it happen.
  6. Obtain regular reporting of business performance – there is now many software accounting packages that give you real time information. Gone are the days you see your accountant after the end of the year to see how you are travelling!
  7. Don’t treat the business as your personal bank account – to be sucked dry for cars and boats and holidays and extravagant spending!
  8. Work closely with your accountant adviser to set down the plans for your business and then track performance regularly as you go.
  9. Should you be fortunate enough to make profits – make sure you keep enough aside to pay the tax that will be due!
  10. You must have adequate insurance – particularly on yourself in case of illness or injury.
  11. Have a plan to chase your debtors and get paid quickly – short payment terms – or better still – no credit sales. Have systems in place to get paid when the work is done – or in advance.  (eg a tradesmen could prepare the bill and have the customer pay by credit card before they leave the job site).

My experience shows that for every 10 businesses that are listed for sale – most are not worth looking at – or at best might provide you with a job – ie will pay you about as much or less than a job working in that same business!   Many business owners don’t earn as much as their employees take home…. But they have a lot more stress and paperwork!

Remember, you are better off spending $1,000 with an adviser to be advised not to proceed than it is to spend $100,000 on a bad business venture and go broke!

The business advisory team at Green Taylor Partners can certainly assist you with all the above issues and help you make the right decisions.  Business is tough – but it can be very rewarding with the right attitude, passion and advice.