In Queensland alone last year, according to the Insolvency Trustee Service Australia, there were around 1350 bankruptcies which were business related. That does not include personal insolvency arrangements, which are arrangements with creditors designed to avoid bankruptcy. Statistics provided by a recent report commissioned by the Universityof Melbourne indicate an increase of over 12% in last year’s figures. That same report also indicated the most common causes of bankruptcy were credit, health issues and mortgage default. Surprisingly, more than 27 percent of bankrupts listed their occupation as managers, administrators or professionals so it’s becoming more of a middle class problem than one might expect.
Bankruptcy is only one aspect of the equation however, as the Bankruptcy Act applies only to individuals. Companies on the other hand are governed by the Corporations Act and rather than being made bankrupt, are placed in liquidation, administration or receivership.
On the corporate front, according to ASIC, therewere 1541 companies in Queensland that were placed in external administration during 2008. While figures for January only are out, there were already 236 insolvency appointments to companies in Queensland for 2009 compared with 140 for the same time last year.
Aside from the causes I mentioned above, anecdotally, and in my experience the most common causes of insolvency are:
1. cash flow issues –inattention to proper systems and procedures for the collection of revenue e.g.ineffective terms of trade and security for payment if credit is given, ineffective internal audit controls to prevent fraud, irregular debtor recovery and inadequate working capital;
2. inexperience in business matters – while someone may have the skills to carry out a particular trade or profession, even be the master of their particular craft, it does not follow they have the skills or wherewithal to run a business;
3. lack of planning – the overwhelming number of business failures I’ve seen in 20 years of practice are due to a lack of proper planning – cash flow and budget, business and strategic planning, marketing etc. The old saying might be trite but ‘fail to plan, you plan to fail’.
4. documentation – the number of times I have see people’s failure to properly document relationships is astounding. Be they of the nature of rights of equity holders in the business (partners, shareholders etc), supply and distribution chains, credit arrangements, banking etc. a failure to properly document the key business relationships can cause significant financial stress to a business. Litigation is an expensive process but in the absence of documentation properly reflecting agreements which cater for alternative dispute resolution, sometimes people have little choice other than to ‘bet the company’. Not everyone wins those bets.
5. inadequate advice – many people either do not obtain advice from their professional advisors (lawyers and accountants in particular) due to the perception the costs are too great. The cost of establishing and maintaining the correct structure at the start is cheap compared with the costs of litigation. It ought be looked at in much the same way as insurance – sometimes you just can’t afford not to have it. However, the overwhelming majority of people whose businesses fail do not have adequate structures in place to protect their key assets. Alternatively, if they do, they have failed to obtain regular advice on how to maintain the effectiveness of those structures over time.
6. Ignorance – it is not uncommon for people to adopt the ‘ostrich’ approach to difficulties that at first blush may seem insurmountable. If there is one guaranteed cause of business failure it’s to stick one’s head in the sand and hope things will improve. Dealing with problems, whether they be the tax man, a difficult partner or debtor who by the size of their account is extorting you into unprofitable arrangements, must be dealt with head on with the same confidence that led you into starting the business in the first place.
7. mediocrity – the ‘lifestyle’ of the Sunshine Coast seems to engender an overwhelming sense, or acceptance, of mediocrity. Despite appearances (or is it wishful thinking), globalization affects the businesses of the Sunshine Coast every bit as much as it does New York, London or Sydney. We compete on a global stage and to do so we have to be the very best. Mediocrity, be it in service, staff quality, product, attitude or culture, just will not cut it in the modern marketplace.
While these are all ‘technical’ causes of insolvency, of course there’s no guarantee that adherence to all the correct principles of business will save a business. Often enough, the cause is an external event beyond the control of the business owner - e.g. fraud,market failure, supplier failure and so on. The important thing for people to understand is that it’s not always their fault and even if it is, if they actually have the courage to deal with the problems quickly enough they can either turn things around or at the very least escape the worst. There is no one I have ever met in the business world who hasn’t made a mistake but there’re plenty who aren’t brave enough to admit it – a lot of them fall victim to business failure.
The economic crisis (none dare call itrecession) has effects that sometimes are just too difficult to trace or monitor. The effect of one business’ failure also has significant ramifications, like ripples on a pond. How many of the 80 odd staff who lost their jobs at EcoNova have been able to obtain new jobs? What happens to the businesses that relied on those people’s income to survive? The failure of one business can lead to the failure of many others as no one operates in isolation. It really is amazing, when one thinks about it, as to the level of interdependence we all have even on a daily basis. So, the cold hard reality is that some businesses will fail, no matter what they do and for reasons well beyond their control.
There are no guarantees in life and, as Sir Peter Abels was fond of saying, ‘while none of us have the right to earn a profit, we all have the right to fail’. At least those businesses that keep in mind the above matters are all likely to have a much better chance of surviving the recession.