Now is a bad time that’s a good time time for advisors to be pro-active
If ever there was a good time for advisors – accountants, lawyers and business analysts -- to be pro-active, it’s now.
It’s also a good time for them to help turnaround a disquietingly bad time for their clients.
Credit Watch data shows businesses’ late payments of their accounts are at a six-year high, signalling cash flow stress that’s spreading across Australia’s business landscape.
Alas many of these late payers are clients of advisors who could be helping them manage financial difficulties, advisors who would be aware of the significance of late payment behaviour as an early-stage threat to their clients’ solvency.
For advisors are ideally positioned to suggest procedures that can avoid business failures that are preventable. These experts know that late payments are far more than just cash flow inconvenience. They indicate structural problems, and that businesses with escalating cash flow problems are losing ability to control their working capital cycles.
A late payment trend can develop long before a director recognises it as an insolvency risk, is likely to receive a director penalty notice, or any other kind of notice that indicates looming bankruptcy.
Directors tend to focus on revenue, order books and supply issues, while advisors’ concerns are more with deeper indications of distress – aged receivables, tax arrears, creditor pressure and any marked deterioration of payment behaviour, all being more significant signs of a drift towards insolvent trading.
But however, and whenever it occurs, Macks Advisory believes confronting a late payment trend promptly -- whether a business is paying its bills late or being paid late -- can avoid a slippery slope to insolvency.
Proactive advisors’ concerns
Roads to insolvency have signs easily recognised by advisors – extended payment terms, cashflow stress, failure to meet BAS, PAYG, GST and superannuation obligations, supplier issues, and signs of director distress.
Late payments, the first and most readily visible of these signs, occur when advisory intervention can be most useful, especially when clients have accumulated tax debt and their businesses are at risk of recovery actions by the ATO.
Construction, transport, retail, hospitality, and manufacturing business are, according to Credit Watch, the most likely to be experiencing the highest levels of late payments. They tend to operate on very slim margins, so that as lateness increases, insolvency risk accelerates -- a red flag that should alert advisors to the need to review a client’s business.
Many businesses may superficially present well, showing strong revenue, full order books and high customer demand, but when customers pay late, this denies operators opportunities to convert revenue into cash. It’s a scenario that’s a common precursor to so-called “busy-but-broke” syndrome which is an indicator of impending insolvency likely to result in liquidation – particularly for small businesses.
Why advisors are important
A reasonable person might assume it’s obvious why business owners need advisors, but it’s equally obvious from our experience that many people running businesses believe they don’t need professional advice – notably owners of small businesses.
They don’t understand that solvency is not determined by activity, but liquidity, and they fail to appreciate that advisors can be helpful when liquidity is threatened.
This can occur when a business misses BAS, other tax and super obligations, when ATO liabilities are growing, when directors seem likely to be issued with Director Penalty Notices (DPN), and where there are statutory demands on the business and/or creditor enforcement.
ATO tax debt defaults have surged recently, three of the four highest increases since the COVID pandemic occurring in the past four months.
Lawyers are seeing increasing instances where commercial behaviour is tending to involve legal risk, and for accountants it’s a time where their early intervention can prevent many a business’s drift towards insolvency and their owner’s bankruptcy.
Proactive advisors can add or at least maintain a business’s value, by stress testing cashflow under delayed terms and reviewing aged receivables with an eye to their significance as a business risk. This can depend on where the risk is concentrated and who are the chronic late payers.
Good advisors help directors avoid panicky last-minute decisions that can be terminal for a business. Early professional involvement can deal with financial difficulty to yield best possible outcomes for all associated with the business – not only directors but employees and creditors.
By being correct in their proactivity, advisors can not only prevent business failures that are avoidable, improve creditor outcomes and reduce legal and compliance risks, the advisors’ success also enables them to retain clients and possibly attract new ones.
Useful ASIC report
If you’re a business advisor, a newsletter reader who is running a business in financial difficulty, or you have a friend or acquaintance operating such a business, you may be interested in an Australian Securities and Investments Commission (ASIC) report released this month. It examines how voluntary administration (VA) and deed of company arrangement (DOCA) processes have worked for companies between July 2021 and June 2025.
To see the Report 836, copy “Review of voluntary administration and deed of company arrangement process: 2021-25” into your browser.
Adjacent to the report, ASIC has also published a supporting data pack and infographic that provides more detailed aggregate data, allowing viewers to filter searches by characteristics of interest – including company size, industry and appointment outcomes.
Key observations from the report are that:
- VAs and DOCAs remain important restructuring tools, especially for larger and more complex appointments
- VAs account for a smaller share of external administrations than previously reported.
- Outcomes are strongly influenced by size, larger appointments being likely to result in DOCAs, and smaller ones more likely to proceed towards liquidations.
- DOCAs support a range of commercial outcomes including continued trading, sale of businesses or assets, or compromises on creditors’ claims. (The structure of DOCAs affects outcomes for businesses depending on a business’s potential for trading profit. Such arrangements often take lengthy times to complete and the longer the time the more likely businesses are to fail and end in liquidations.
