[EP 035] Recognising Signs of Insolvency Risks Part 1: Top things many business owners and accountants miss

This episode is part 1 of a two-part series with Antony de Vries, the founding partner of DVT Group. Antony shares his insights on the real risk of company insolvency from decades of experience helping business owners who lose financial control. Learn to identify the warning signals and arm yourself with information before it’s too late.

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Episode Highlights

00:51 What to look forward to
03:55 DVT group: their clients and services
05:32 Common theme: business owners come through too late
07:47 A success story: turning a business around
10:54 Simple conversations as a real value-add to the accounting practice
13:59 Cost of failing to ask for help
16:28 Time makes all the difference when your business is in a financial strife
17:33 Keeping the love and business together
18:21 Personal risk exposures for directors
23:00 Warning Signs: Poor Cash Flows
25:35 Quick Recap

Joanna: Hi, it’s Joanna Oakey here. Welcome back to Talking Law. Today we are launching a two-part series all around the topic of business insolvency and in particular recognizing the signs of insolvency.

 

What to look forward to

These two episodes are aimed at all businesses in order to be armed with information about recognizing signs of financial distress both in their own organization and in their clients who may owe them money. But it’s also aimed at accountants and other professional advisers that work with businesses in providing some insight as to the warning signals that we as advisers should be looking out for and what to do if we’re seeing some of those troubling signs.

I really feel deeply that this topic is a very important one for business owners and accountants to understand and to have a refresher on every now and again. Because some of the most emotional episodes that I have seen with my clients over my history as a lawyer have related to businesses when they’ve been facing or indeed undergoing periods of insolvency in their business and in many instances due to the damage that they had done because they were simply unaware of what was slowly happening to their business as we talk about in this episode, that boiling frog syndrome, and often business owners are unaware that this situation is completely avoidable. And I have a few really raw memories of clients whose businesses didn’t make it and ended up in insolvency and some in the worst instances with directors themselves ending up in bankruptcy and these events were really raw for me having to witness what was going on and obviously even worse for the clients.

And it’s fascinating how easily some of these situations could be resolved if they’red dealt with early in the piece. So for this two part series I have brought in an expert in the area Antony de Vries. Antony is the founding partner of DVT Group which has been around for 23 years helping businesses and companies that are out of financial control. They do business advisory work. They’re liquidators and they’re also business turnaround consulting specialists. So I thought they’d be the right people to turn to for us to give our listeners some really good insights into this area. So in these two episodes we focus on two areas – providing education and insight for businesses both in relation to dealing with their own finances and in recognizing signs of financial distress in their clients that owed them money.  But we also discuss a lot of areas that are particularly relevant for accountants to consider in relation to their practices and how they can make simple changes in their approach with their clients that can provide a massive value-add. I really enjoyed this discussion with Antony because it really hit on the human aspect of this area of the risks of company insolvency and highlighted some great examples of practical steps that business owners and their accountants can take to help avoid the risk of insolvency of the business and what to do when there really is a risk that’s calling on the door.

 

DVT group: their clients and services

Joanna: Hi Antony, thank you so much for coming on the program today! Let’s maybe start off with who is DVT Group and who do you work with?

Antony: Hi, good day Joanna! DVT has been around for 23 years and what we do is we help people who lose financial control. So we’re sort of in the place where we help people retain control and get back in charge of their business. Often times when they come under pressure, when they haven’t got enough money to pay the people that they’re using, that then causes them a lot of discomfort and distracts them away from the main game of running their business and we’re here to help them bring that back in line.

The people that come to us and we help out generally fall into the small to medium size end of the market. Our main positioning is we would take businesses that would have an annual turnover of say five million dollars up to 150 million. The bulk of our work sort of falls in that space between 10 to 30, 35 million dollars turnover.

We’ve got two offices, one located in Sydney CBD and one Parramatta CBD, so we’re New South Wales sort of centric. But we’ve had engagements all around Australia and sometimes overseas as well so we cover pretty well. We’re very busy. For 23 years, we’ve looked at more than 2000, 2500 different types of engagements over that period of time and it pretty well covers every industry sector.

 

Common theme: business owners come through too late

Joanna: Wow! So tell me, with that sheer volume of cases and matters that you’ve seen. Are there any themes that pop out to you as the sort of lessons that many business owners should have known before they got themselves into strife? Are there any themes that have come across your desk?

Antony: The biggest one and the most disturbing ones to me is that business owners come through too late. Australians are actually quite a proud society and no one really wants to put their hand up and say, look I’m just not sure whether it’s getting a little bit too hard for me. But she’ll be right mate, I’ll be able to sort of bat on. We’ll get through this.

The most frustrating part of our job is we get the guys who left it too long. They could have actually taken some sort of corrective action a little bit earlier. But these guys who left it too late what happens is the longer they go, the deeper they get into trouble. Their options start to evaporate. And if they leave it really late, they’re often left with one option or sometimes no options at all. That could have been avoided.

If they actually were to ask their accountants. I’m feeling a bit of pressure here. I’m thinking about this. I’m not sure about that. Where can I go? Who could I see that would help give me some indication as to where we are? Stuff like that. If they do that early enough, there’s a range of options that they actually have available to them. When they have a selection of different alternatives, they can find the alternative that’s actually the best one that’s suited for themselves. Their chances of success are enormously improved.

So the biggest theme that I would have is don’t be shy and ask. Even if you ask and you have no problem at all, you’ve at least asked and at that point in time you have no doubt your business will benefit from the questions that you’ve asked and the things that you put in place. So that’s the most frustrating thing. If people can get past that, I think it’s actually quite smart.

 

A success story: turning a business around

Antony: The guys who do come to us in the early stage they go out the other side and they’re stronger for the experience. They do much better. Like the other day I had a call from a business that was selling high end audio-visual Hi-fi speakers, televisions all types of car audio, that type of stuff. The guy actually came to us 14 years ago and he was on the phone telling me how good his business is going now and what we did and what he learned back 14 years ago is actually set him up so he’s actually grown the business maybe five fold.

Joanna: That’s phenomenal.

Antony: In turn, he’s in a much stronger financial position than what he was way back then. It was quite encouraging to hear his feedback. And it was all unsolicited so very happy. That’s what can happen. That was someone who came in at a relatively early stage.

Joanna: And what were those steps, do you recall? Those particular steps that had been taken at the time that really made the biggest impact to his business turnaround.

Antony: What actually happened was he got into a bit of strife financially and he was one of these other people that sort of didn’t really come early enough, but he didn’t come too late either. So he was sort of in that middle area.

We used the appointment of a voluntary administration process which was the step that actually put in place a moratorium, gave him breathing space with his creditors, and then in turn he identified or collectively identified what was the cause of that problem. He tried to rectify that and then was able to get back onto a level playing field. But the discipline of what he went through and that close shave with what could have been helped him focus his mind. So now his business has grown five times and he has no debt. He’s in this position where he’s been able to manage his stock correctly. He’s been able to manage his cash flow correctly and efficiently. And he actually has used that to invest back into the business to actually allow the growth to be sole funded.

Joanna: I think that’s really important. It’s great to hear stories like that because you talked earlier about the issues for businesses leaving it too late. Certainly, some of the saddest stories that I have seen have been those exact examples of businesses leaving it too late, which as you rightly identified is sometimes because people are too concerned to call out for help. But sometimes it’s because they just don’t understand the signs, the signs of what is potentially happening to their business.

So maybe if you could talk to our business owners out there that are listening and also to our accountants who act for those business owners who sometimes often are at that coal front of helping to recognize these signs. What are the signs that both of the business owners and their accountants should be looking out for?

 

Simple conversations as a real value-add to the accounting practice

Antony: Joanna, can I kind just add one thing for you into the sides? I don’t want to be down on the business owners because they’re in a position where they might feel very isolated. And they don’t necessarily seek out or it’s not readily available the support that they could really use, like the accountants that they have. (And I’m not picking on the accountants either.)

The business owner sees the accountant as being a compliance person. Somebody who’s going to do their tax returns and who’s going to do their BAS report. He will come to the accountant at the last minute and he will give him the information and the accountant will work on that and do that. And then the accountant will bill for the work, asked to be paid and the business owner will say “Oh gee there’s the bill.” Then say I don’t really want to pay for a higher bill than necessary and so he doesn’t really say look I’m feeling a little bit of a squeeze here. Do you really think I really do need to take some corrective action? He won’t even ask the questions. If the accountants out there can actually have a feel for how the business is going, I mean they will see the financial numbers, they could lead off in a non-threatening way “How’s it going? We can see that your numbers are a little bit less this year than what they were last year. Are you meeting your debts? Are the creditors okay? Are they up to date or are they sort of hassling you for payment? Are they are cutting you back on supply? Just simple questions like that to start the conversation. And if they start the conversation, who knows where it leads?

Joanna: Absolutely. Which I think is really important because many accountants I speak to are frustrated by the fact that many of their relationships with their clients is compliance-based. And they’re really looking for ways to value-add. But I guess what you’re saying here, some of the potential ways to value-add are really just simple conversation starters.

Antony: I think so. Anybody who owns and runs a business, it’s a commitment. And it’s a big commitment. It’s a commitment in some cases it’s even greater than what your relationship is with your spouse. So with a couple of simple questions, the majority of people will most likely be more than happy to talk about their business because of that commitment and because they sit there by themselves. It’s tough. They would value such an open dialogue with those simple questions they’ll ask. It’s really important that it gets recognized, it gets talked about and the discussion is had. Because if it doesn’t work out, not only is it going to be a major impact on the business owner, the business owner’s family will suffer, the employees that are there won’t have a job. So those guys and their family will suffer. The supplier’s company won’t have a customer, they will suffer. And the owners of the business, if there are external shareholders, they’ve lost their investment as well.

 

Cost of failing to ask for help

Antony: Joanna, in my mind it’s just lose lose lose and potentially that might be avoided if someone had actually had the conversation a little bit earlier.

I had a guy once. This guy, he was a lovely guy. He was a Vietnam War veteran. And what he was doing is he had set up a business that was actually removing asbestos. A few years ago everyone just removed asbestos and dumped asbestos on the side of the road. But when the laws tightened up and there was a requirement about the safe removal of asbestos, that was his job. He and his staff, the people that worked for him, would do big jobs like that. They removed the auspices inside the Supreme Court building in Sydney up there at Phillip Street. It’s an old big tall building.

We went up there one day and we looked through almost like going through like the Mars landing where you actually have to dress up in a white suit. You go through an airlock and in this environment it was like perfectly sealed and they were taking asbestos out and then when you finish you have to get through showers to wash it all off.

Joanna: I’ve got the visuals. That’s great!

Antony: But the sad part was that this guy got hit with Agent Orange. He was a Vietnam War veteran. He was in the Vietnam War. And that caused his health to go down.

And so he didn’t ask help along the way and then his health got to the point where he just couldn’t run the business. A good solid profitable business was just left with nowhere to go and it all closed down. You contrast that to the guy who had this sort of audio-electrical type business and 14 years later he’s still a lot better than he ever did.

Now with this guy over here his health was in jeopardy but he could have earlier on found a pathway where we could have found somebody else or one of the staff to actually take over and continue on and do a transition from him to these guys over here. There could have even been a bit of money exchanged for that which could have helped his family. It just frustrates me when it doesn’t have to be that way.

 

Time makes all the difference when your business is in a financial strife

Joanna: Effectively the difference between these two examples, do you think the main element was time, the amount of time that you had to take action before the company was so cash strapped that it ceased? Is that the main element?

Antony: Yes. So the first guy came. He could have come a bit earlier and not have to worry about Involuntary Administration Process. But he didn’t so we ended up needing to use the Corporations Law Moratorium Protection. This guy here went further down the road, got to the place where there were no other alternatives other than to finish off the existing work and shut the doors.

Joanna: And what happened to him afterwards? Do you ever get these stories afterwards?

Antony: He died and he left his wife and his kids behind. And they were left behind without a business.

Joanna: Wow.

Antony: Had we been able to get there earlier, we could have transitioned that business to somebody else for a sale price. And then the family could have actually had the benefit of that money.

Joanna: That’s really hard hitting.

 

Keeping the love and business together

Antony: Yeah. And that’s sort of the world we live in. That hard hitting doesn’t happen every day. We have a saying that when the money goes so does the love. I’ve seen it so many times that when the business is in financial trouble the pressures come and spill over into the family life. And the husband and wife end up splitting up.

Joanna: We have certainly seen examples of that as well. I think you’re spot on there.

Antony: On a positive side, I’ve also seen examples where it brings a husband and wife together. Cause that that actually helps them understand what really is important in life and relationships are more important than money.

 

Personal risk exposures for directors

Joanna: Let’s talk first about the risks for directors personally. Many business owners, many directors whilst they’re aware of their duties as a director and they’re aware just generally there is some exposure connected to being a director of a company. Many directors just don’t fully appreciate that whilst they have this entity that is separate to them in their company, there are still risks for them personally if they continue to trade in a business that effectively is insolvent or seen to be insolvent at a particular point in time i.e. if they’re not getting help soon enough. So maybe if you can talk to us a little bit about experiences that you’ve had or examples that you’ve seen where this really hits home.

Antony: What drives all of that is a lack of money. When a company can’t pay all its liabilities or all the debts that it incurs whilst running its business that creates this shortfall. The law likes to say that you are a director. You are meant to be smart, intelligent and responsible. You shouldn’t go and seek money from other people (employees, suppliers for goods and stuff like that) when you don’t have a reasonable chance of knowing that you can actually pay them for that work.

If you’re in that place, and if the company goes into liquidation, the directors will become personally liable for any shortfall of all those debts that they allowed to happen that remain unpaid.

Joanna: And I think often what happens or what I’ve seen in the past create this immediate risk of personal liability is often a failure these days (since the changes in legislation a couple of years ago) that failure to lodge BASs on time, by triggering personal liability if they’re more than three months late in the lodgement of their BASs and payment. I guess that’s one immediate issue because often when a business is cash strapped they’ll look at creditors that they feel are easier to deal with.

Antony: Yeah.

Joanna: And slow down on those in just lodging BASs for example.

Antony: You’re absolutely right, Joanna. In reality what happens is they’re short of money and the more active creditors, the suppliers or the employees, they will actually threaten to withhold their services if they don’t get paid. So if you have a business that needs a supplier to supply the bricks for example, you can’t build a house if you don’t get bricks. So your business will immediately stop when that supplier said “Hey, pay me or I won’t supply the bricks.” And so you’ll find the money to pay the brick supplier. But the tax department sits there quietly. You don’t hear from the tax department. You actually have to fill in the form and then you have to send the money off to the tax department.

Because you don’t hear from the tax department, you can let a month, three months, six months, 12 months and our tax department is not the most proactive in chasing up people who haven’t paid their taxes, so this allows the director the easy out to go “Well, OK. Instead of paying the money to the tax department, I’ll use that money to buy the bricks to build a house to keep things going.

The tax department has given themselves a special rule that says if you don’t fill in your BAS form within three months, you as a director are now personally liable. So the onus is on the director. It comes and goes over time, the tax department lost their right to actually have that special treatment back in ’93. But over the years they’ve actually clawed back another form of right which gives them the ability to go after the director is he hasn’t filled his BAS forms. They got a report for the super, they PAYG. And if they don’t, they just become personal for it. Straight up. There it is.

The director thinks he’s doing the right thing because he’s going to pay the brick supplier and he keeps busy keeps working. But in the back of it, he’s just created this sleeping time bomb.

Joanna: Absolutely. So I guess that’s a really good reminder for directors about the risks of letting these issues accumulate without getting the right advice because in those sorts of areas simple changes in relation to who they are paying and what they’re lodging and how regular lodgements can make the difference between personal liability and not having personal liability.

 

Warning Signs: Poor Cash Flows

Joanna: Let’s maybe go back now to looking at those signs of a problem. What are those signs where business owners or their accountants on their behalf should be starting to ask questions and think about perhaps getting external assistance?

Antony: Boils down to one simple thing really. It’s cash. Have you got enough money in the bank to be able to draw a cheque to pay the invoices that are due? That’s it. There’s a lot of other things and I’ll go through the other things now. But the main concept is, you’ve got the invoices for the month or the week or whatever it is. Is there enough cash in the bank to actually draw a cheque and pay for those including what you have to pay to the tax department or Office of State Revenue or any of those other authorities, and don’t get the superannuation for your employees?

We in the profession call it poor cash flow. But really that’s just a fancy way of saying have you got enough to pay for what you owe, when they’re asking for it. So I’ll run through the list.

Poor cash flow. If you’re overdue with any of your taxes, being the state taxes or the colony taxes, are you paying your employees superannuation liabilities on time? That’s another one that often gets overlooked like we talked earlier about the tax department. It’s very easy not to pay the superannuations of employees. No one knows until later on. You don’t have to fill in your returns for 12 months and you’ve got that year that you can say Oh I’ll miss it this month but what I’ll do is I’ll catch up next. But next month actually happens to be just repeat of this month and you haven’t gotten the money so you go roll it on to the third month and then all of a sudden, three months turns into 12 months and 18 months and then bang, you’ve got a bigger mountain of debt that is too hard to get over. So monitor your cash flow. I’ve said that before will say it again because it is important.

 

Quick Recap

Joanna: Well that’s it for part one of our two part series in recognizing and acting on the signs of insolvency. Just a quick recap. In this episode we talked about the common theme in insolvency matters which is businesses seeking help far too late. We had a great example of a business owner that was staring down the barrel of insolvency but managed to get help in time to save the business and 14 years later has completely turned the business around and is now nailing it.

We talked about the cost of failing to ask for help and why some businesses leave it too late. And we talked about the personal exposure risk for directors which is a very real risk and an important consideration. And I really do hope that our listeners out there who are directors get some useful tips about what to do and what not to do if you’re involved with a business that is starting to feel a cash flow crunch.

And finally for those accountants out there listening in. We looked at ways that you can provide a real value-add to your clients and to your accounting practice. Next episode of Talking Law. We will be back with the last part of this two part series. In that episode Antony will be going through the warning signs of financial trouble, how to recognize these warning signs and what to do about them once you see them. If you’d like more information about this topic, simply head over to our website at talkinglaw.com.au.

There you’ll be able to get a download of this podcast episode if you want to read it in more detail and you’ll also be able to find details of how to contact. Antony if you would like to and you’ll also find details of how to contact our lawyers at Aspect Legal if you’d like help with any of the items we covered today. So thanks again for listening in. You’ve been listening to Talking Law and Joanna Oakey. See you next time!