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What typically causes businesses to fail?

18 April 2022 Communications & PR Executive Abigail Cheadle e: abi@mcorpadvisory.com.au d: +61 448 139 340 m: +61 448 139 340
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Financial pressure can strike at any time from anywhere. We polled our network of independent, appropriately insured, skilled, trained, qualified and experienced turnaround specialists from legal and finance backgrounds as well as commercial backgrounds to find out what the most common causes were.

We found that irrespective of the size of your company or entity, the following (not in any particular order) were the most common:

  • Bad debts from customers not paying. Typically problematic for sub- contractors and businesses that are overly reliant on one customer.
  • Fraud, usually employee fraud caused by lack of separation of duties in smaller businesses where too much trust is put in staff who can both authorise and access payments. For listed companies or larger unlisted companies it tends to be misstatement which is devastating to cash flow, not because funds have been misdirected but because the regulators begin lengthy investigations, often the management and board are replaced or distracted, costly advisers are appointed, resulting fines are generally levied and confidence is generally lost.
  • Tax office audits which are timely and costly as they often carry significant penalties and can end in directors being criminally prosecuted.
  • Irrational pricing from your competitors (or economic downturn, loss of niche market or product) which results in decreased demand. Often seen with new entrants joining the marketplace that will fore sack short term profitability to obtain market share. They are usually large so can scale easily or extremely well capitalised global players.
  • Running or defending litigation (i.e. shareholder disputes, wrongful dismissal claims, class actions) which costs include: your legals and courts costs; if unsuccessful, their costs and paying the order made; and the hidden costs of distracted management by fighting the litigation.
  • Regulatory and licensing breaches (i.e. occupational health & safety breaches, or irresponsible practises) which more often than not only result in a fine but can result in loss of a license or restraint from trading. They usually involve lengthy drawn out investigations which involve management, hiring of advisers, can affect debt covenants and often concern stakeholders.
  • Cyber breaches, which could damage a business because it releases: proprietary information to competitors; disrupts the entire business by shutting it down; or releases private data which requires reporting to authorities and the parties affected, and attracts fines.
  • Depending on the type and size of business, industry and location, the following can affect the financial status of a business dramatically: natural disasters; environmental change or damage; or unforeseen events.
  • Divorce can sometimes cause one owner of the business to pay out the other. Not only distracting but it may cause a capital deficiency.
  • Action by lenders where debt covenants are broken. Prior to the Safe Harbour legislation, financiers and bankers might previously have insisted on appointing an Investigating Accountant but now they are just as likely to work with an appropriately qualified reliable Safe Harbour adviser appointed by the directors as long as they are assured that the outcome for them will be better than the alternatives.
  • Other causes include but are not limited to: loss of critical ingredient, inability to secure patent or product copied, interest rate hikes, poor communications or crisis management, key person loss, reputation damage, strike, or not sufficiently hedging risk exposures.

If you find yourself in one of these situations, don’t wait until its too late, seek Safe Harbour protection when its still applicable and avoid formal insolvency appointments to navigate your business back to safe sailing with one of the appropriately selected advisers from www.safeharbournet.com.au.

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What typically causes businesses to fail?

18 April 2022 Abigail Cheadle e: abi@mcorpadvisory.com.au d: +61 448 139 340 m: +61 448 139 340

Financial pressure can strike at any time from anywhere. We polled our network of independent, appropriately insured, skilled, trained, qualified and experienced turnaround specialists from legal and finance backgrounds as well as commercial backgrounds to find out what the most common causes were.

We found that irrespective of the size of your company or entity, the following (not in any particular order) were the most common:

  • Bad debts from customers not paying. Typically problematic for sub- contractors and businesses that are overly reliant on one customer.
  • Fraud, usually employee fraud caused by lack of separation of duties in smaller businesses where too much trust is put in staff who can both authorise and access payments. For listed companies or larger unlisted companies it tends to be misstatement which is devastating to cash flow, not because funds have been misdirected but because the regulators begin lengthy investigations, often the management and board are replaced or distracted, costly advisers are appointed, resulting fines are generally levied and confidence is generally lost.
  • Tax office audits which are timely and costly as they often carry significant penalties and can end in directors being criminally prosecuted.
  • Irrational pricing from your competitors (or economic downturn, loss of niche market or product) which results in decreased demand. Often seen with new entrants joining the marketplace that will fore sack short term profitability to obtain market share. They are usually large so can scale easily or extremely well capitalised global players.
  • Running or defending litigation (i.e. shareholder disputes, wrongful dismissal claims, class actions) which costs include: your legals and courts costs; if unsuccessful, their costs and paying the order made; and the hidden costs of distracted management by fighting the litigation.
  • Regulatory and licensing breaches (i.e. occupational health & safety breaches, or irresponsible practises) which more often than not only result in a fine but can result in loss of a license or restraint from trading. They usually involve lengthy drawn out investigations which involve management, hiring of advisers, can affect debt covenants and often concern stakeholders.
  • Cyber breaches, which could damage a business because it releases: proprietary information to competitors; disrupts the entire business by shutting it down; or releases private data which requires reporting to authorities and the parties affected, and attracts fines.
  • Depending on the type and size of business, industry and location, the following can affect the financial status of a business dramatically: natural disasters; environmental change or damage; or unforeseen events.
  • Divorce can sometimes cause one owner of the business to pay out the other. Not only distracting but it may cause a capital deficiency.
  • Action by lenders where debt covenants are broken. Prior to the Safe Harbour legislation, financiers and bankers might previously have insisted on appointing an Investigating Accountant but now they are just as likely to work with an appropriately qualified reliable Safe Harbour adviser appointed by the directors as long as they are assured that the outcome for them will be better than the alternatives.
  • Other causes include but are not limited to: loss of critical ingredient, inability to secure patent or product copied, interest rate hikes, poor communications or crisis management, key person loss, reputation damage, strike, or not sufficiently hedging risk exposures.

If you find yourself in one of these situations, don’t wait until its too late, seek Safe Harbour protection when its still applicable and avoid formal insolvency appointments to navigate your business back to safe sailing with one of the appropriately selected advisers from www.safeharbournet.com.au.