Is your business destined for failure? Has your business lost its mojo? Do you feel like your company is in trouble? It would be a daunting experience when you see that your debts are mounting and you are simply treading water.
It is noted that there is an increasing trend for people to engage in illegal phoenix activity as a quick way to get rid of the Company’s debts. Australian Taxation Office (“ATO”) describes illegal phoenix activity as when a new company is created to continue the business of a company that has been deliberately liquidated to avoid paying its debts including taxes, creditors and employee entitlements.
Illegal Phoenixing is often a strategy adopted by a company when all other rescue options are exhausted. The process and/or transfer of assets is often rushed and completed in desperation, leaving the directors open to prosecution.
But it doesn’t have to be this way. More often than not, companies who have found themselves opting for an illegal phoenix transfer, had previously been exposed to red flags and indictors that have either been missed or sub-consciously ignored. If, however, the warning signs are identified and acted upon in the early stages, it significantly broadens the turnaround options available.
Some basic measures companies should monitor, include, but are not limited to, are:
- Lower liquidity: Liquidity is the ability of a company to quickly convert assets into cash so that it can pay its bills and meet other debt obligations.
Examples of liquid assets include cash, debtors (in some cases), marketable securities and certificates of deposits. It is imperative that liquid assets like the above are constantly monitored, as a reduction in same may indicate current or future financial difficulty.
- Low cash flow: A lower cash flow indicates that your Company may not be generating adequate cash to pay its debts as when they fall due. As such, the development and use of a cash flow statement is critical in identifying trading shortfalls/gains, managing cash resources and planning for the future. If your company experiences lower than usual cash flows or is forecasted to experience a trading shortfall, do not delay and seek adequate/professional advice immediately.
- Disappearing profit margins: Anytime you notice that your Company’s profit margins have fallen from year to year, take it as a clear sign that something must be done and/or changed to prevent the slide from the “black” to the “red”. It might be as simple as increasing sales prices by a certain percentage or winding down an arm of the business which does not give and only takes.
- Too much debt: Borrowing too much money to continue operations or to finance new activities can be a major red flag that indicates future problems for your Company. So, compare your Company’s debt ratios with those of others in the same industry to judge whether your Company is in worse shape than its competitors.
In summary, the earlier you recognise the threat of business bankruptcy / insolvency, the stronger your position is when it comes to putting things right. More importantly, identifying the causes of the problems gives you a starting point for solving them. Being proactive, as opposed to reactive, may be the difference in achieving financial success and not financial ruin.