Industries
Patterns of Financial Pressure
Financial pressure does not always arrive as a crisis. Often it develops gradually — and the business owner feels the change before they can clearly explain it.
One difficult month does not establish insolvency. Nor does an ATO debt, a slow-paying customer or a creditor being paid late automatically mean that Safe Harbour applies. But repeated warning signs deserve attention.
1 Cash Gets Tighter
Often the first change is cash.
There is less room between money coming in and money going out.
Payments that once happened automatically begin requiring decisions.
Money expected from tomorrow’s debtor becomes necessary to meet today’s obligations.
The business may still be profitable on paper, but the owner begins to feel that cash is becoming increasingly difficult to control.
2 The ATO Begins Funding the Business
Tax obligations that should ordinarily be dealt with as they arise begin accumulating.
A BAS is lodged but cannot be paid in full. A payment arrangement follows. Then another obligation is added before the previous one has been cleared.
The ATO balance can gradually become part of the working capital of the business.
That is an important financial warning sign and something we want to understand quickly.
3 Creditors Begin to Stretch
Suppliers that were once paid within terms begin waiting longer.
The business starts choosing which creditors need to be paid immediately and which can wait.
At first, the changes may be small.
But over time the creditor ledger can tell an important story about the company’s cash position.
4 Finance Fills the Gap
When operating cash is insufficient, another source of money is often found.
- It may be an overdraft.
- A credit card.
- Equipment finance.
- Short-term business lending.
- Or money introduced personally by the director.
Borrowing can be entirely appropriate.
But when new finance is repeatedly being used to fill an underlying operating cash shortfall, we need to understand why that shortfall exists.
5 The Director Starts Carrying the Pressure
Eventually the financial pressure of the company becomes personal.
- The owner works longer.
- Takes fewer holidays.
- Spends more time moving money between accounts.
- Chases debtors personally.
- Negotiates with creditors.
- Checks the bank balance constantly.
And asks a question we have heard many times:
That question matters.
Look for the Pattern — Then Establish the Truth
None of these indicators should be used in isolation to declare a company insolvent or determine that Safe Harbour applies.
They are warning signs.
When several begin occurring repeatedly, the appropriate response is not to guess.
Investigate.
- Get the accounts current.
- Reconcile the Balance Sheet.
- Understand the debtors and creditors.
- Establish the ATO and employee entitlement position.
- Reconcile the loans.
- Understand director drawings and funding.
- Measure profitability and cash.
Then ask the most important question:
That brings us back to the beginning of our process:
Establish the Truth → Build the Course of Action → Measure, Challenge and Correct.
Financial pressure is information.
The earlier we understand what that information is telling us, the earlier informed decisions can be made about what needs to happen next.
Talk to us
You don’t need to diagnose the problem before speaking to us. Tell us what is happening, tell us what is worrying you, and show us the numbers. We will start by helping you understand what questions need to be answered.