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