After the pandemic comes the double blow of economic pressure and supply chain issues, and this has sadly led to immense challenges for businesses that have been unable to keep up with rising costs and evolving customer numbers.
Insolvencies are on the rise, so how do you prevent your organisation from becoming a statistic in 2024?
Current insolvency rates in Australia
There were high numbers of insolvencies in 2023, with 3,929 businesses going into external administration by November. This figure represented a 35 per cent increase on the previous 12 months.
Most insolvencies were in the small to medium enterprise (SME) sector, and blame is being placed on the fallout of the pandemic.
Prevention is better than cure
It is possible to come back after insolvency, but it is a far better option to stay as far ahead of debt collectors as possible.
The following steps will help you maintain a more financially sustainable business
1. Be clear on your current circumstances
To start with, you have to have a clear understanding of the financial health of your business.
Regular reviews of your financial statements and cash flow projections and keeping an eye on your accounts payable and receivable will give you a solid idea of how well placed you are to make it through the weeks and months ahead.
Sitting down with your accountant is the first step; book an appointment to make sure you’re aware of what’s going on with your money.
2. Diversify your revenue streams
Relying on a single product or service can leave your business vulnerable, especially in these changing times when AI seems to be replacing every job that’s out there.
Work to discover ways to diversify your offerings and tap into new markets. Diversifying will give you more ways to make money and give you a safety net against a downturn.
How do you know what else to sell or offer as part of your services? Talk to your clients and team; find out what’s most in demand or difficult to source for customers and what can be quickly and easily integrated into your business.
3. Build strong relationships with suppliers and creditors (and the ATO)
In 2024, suppliers and creditors are not likely to be as forgiving as they may have been in the past. Every household and business is feeling the crunch of the cost of living crisis, and anyone you owe money to will want it as soon as possible.
If you’re struggling to pay debtors, keep the lines of communication open. Find out ways to at least reduce your amount owing over time and they will be less likely to take legal action.
The other option is to see if you can negotiate a better deal. You may have some loans, for example, that can be restructured, or you might be able to pay less on insurance premiums etc.
In terms of the tax office, if your tax debt is mounting, work with your accountant to arrange a payment plan.
4. Stay on top of regulatory changes
Business laws and regulations can change, so staying informed is essential.
Keep a watch on any changes to tax laws, compliance requirements, and any industry-specific regulations. This is a perfect example of prevention being better than cure because if you spot the changes in time to make the proper adjustments, you won’t face any financially-damaging backlash.
5. Create a contingency plan
Creating a contingency plan means having the cure prepared for a situation where your business gets close to an insolvency-related predicament.
Your contingency plan should outline steps to be taken in case of financial distress, including cost-cutting measures, selling assets, renegotiating contracts, or seeking additional funding. It might prompt you to get ahead of the game so you don’t ever end up needing to press the emergency button.
6. Invest in technology and innovation
In an increasingly tech-focused world, you need to embrace the latest ways of doing things so you don’t find yourself lagging behind the competition.
While it’s not about completely eliminating your headcount, technology can help you maximise output and profits. Are there ways to rejig your processes and systems so things are automated and you can serve more customers with less effort? Your accountant may have some tips.
7. Regularly review and update your business plan
While every business needs a business plan, it should not be set in stone. A dynamic business plan is a roadmap for success, especially in a challenging economic period.
Regularly review and update your plan to reflect changes in the market, industry trends, and financial goals so you can prevent a situation where your cash flow suddenly stops.
Bonus tip: Seek professional advice
Having good financial guidance will help you avoid a situation where business debt is out of control. You’ll know what’s ahead so you’re better prepared to weather a storm, or you’ll be able to make a tough call before things get out of control
Need help with tax accounting so you can stay on the right track, away from insolvency stress? Reach out to Mobbs & Company today.