Client Journey: Is This Guy the Problem?

Contents:

Small business insolvency in Australia cannot just be blamed on external factors — often it is the directors themselves causing significant issues. In this article we ask: Are you the problem?

Common blindspots leading to insolvency

1. Ignoring the books and financial signals. According to the Australian Securities & Investments Commission (ASIC), 52% of company insolvencies are due to inadequate cash flow or high cash use. Another critical factor in those statistics is poor financial record-keeping. Clearly, the two are related: “If you can’t measure it, you can’t manage it”, as they say. Is this mainly a question of personal responsibility? With modern accounting software simplifying the process, there is little excuse for neglect. Is it a matter of disorganization?
2. Over-leveraging the business. Over-leveraging is particularly common in the construction industry, which reports the highest number of insolvency cases in Australia  at 28% of the total. This issue often arises from the need to cover costs for wages, suppliers, equipment and materials before receiving payment. To some extent, with the majority being subcontractors, small businesses may have a limited say on the terms of construction contracts. At the same time, it may be that there is a level of ignorance in the amount of capital needed to start such a business and directors shouldn’t be going into the level of debt that they are for such businesses.
3. Poor strategic planning. Directors frequently get bogged down in daily operations and fail to allocate sufficient time for strategic planning. Effective strategy requires making tough decisions, including saying no to certain products or services. Sometimes this is a matter of directors being “control freaks” and unwilling to properly delegate tasks that can be delegated to leave them space to focus on the strategic. It is crucial for directors to work on the business, not just in it. 
4. Stubbornness.  Many directors delay seeking help until it’s too late. Perhaps they have too much confidence in themselves to “ride out” any issues. Don’t be like NSW League player Jarome Luai jumping into a wave pool and nearly drowning. Just because you are brilliant at League or as a practitioner in your industry, it doesn’t mean you can’t get out quickly out of your depth in other areas: There is no shame in asking for help. 
5. Substance abuse. Although not often discussed, substance abuse is prevalent in industries with high rates of insolvency, such as construction and transportation. Alcoholism and drug abuse can compound existing problems, as can gambling addictions among directors.

So, you’re the guy: What now?

So if you know that you are part of the problem, what next? We would suggest the following:

• Early intervention and advice. It is important to seek advice relating to the issue you are having. This could be business advice, or it could be professional help for any personal issues you are dealing with. As a less formal (and perhaps less daunting option), peer mentorship can work well for some people. This way you can be guided by people who may have been in a similar situation and can empathise.
• Implementing sound accounting practices. This includes utilizing modern accounting software to streamline invoicing, payroll, and expense tracking. It also means having KPIs in place relating to cash flow, profitability, and debt levels to provide early warnings of financial distress. Perhaps most importantly, with accounting systems in place you may find that any anxiety you had around business financial issues starts to fade. 
• Learn to delegate. This includes identifying key areas where delegation can enhance efficiency and sound succession planning — ensuring that the business can continue operating smoothly in the director’s absence. This means identifying and training potential leaders within the business.
• Foster a healthy work environment. Promoting a healthy work-life balance can reduce stress and prevent burnout both for yourself and other employees. Take your weekends off — it often leads to higher productivity and better decision-making. 

Look within yourself to turn around the business

As cheesy as it may sound, any director facing financial difficulties in their business needs to look inwards as well as outwards. With issues like poorly organized finances, poor work-life balance and substance abuse being major contributors to insolvency in Australia, these areas need special attention. If you don’t deal with these problems, it is likely that solvency issues will arise in the future even if you deal with the crisis at hand.