[EP 036] Recognising Signs of Insolvency Risks Part 2: Top things many business owners and accountants miss

Welcome to part 2 of this two-part series on the area of insolvency risks with Antony de Vries of the DVT Group. To close this series, we dig deeper into the warning signals and discuss the underlying concepts that business owners and their accountants should be looking out for.

CLICK HERE to download the transcript for this episode.


Episode Highlights

02:19 Warning! Bad Recordkeeping

04:53 Good growth vs Bad growth

07:09 The concept of having enough

08:58 The concept of overexposure

13:29 First, talk to your accountant

18:27 The boiling frog syndrome

23:17 Getting in touch with Antony and DVT Group

25:11 Quick recap

Joanna: Hi, it’s Joanna Oakey here and welcome back to Talking Law. Today we have our second part of our two part series all around the topic of business insolvency, and in particular recognizing the signs of insolvency. This episode and the previous one have insights relevant for both businesses and accountants and other professional advisers that work with businesses in providing insight as to the warning signs that we should be looking out for, and what to do if we are seeing some of those troubling signs.

Now if you missed part one of the series, head over to our website at talkinglaw.com.au and look for episode 35. In that episode, we had on board a fabulous guest Antony de Vries from DVT Group talking about the most common theme that he sees in business insolvency. He also talked about examples of the consequences of leaving it too late, and on the upside he also talked about uplifting examples of what could be done with clients that get help early enough. We also talked about the risk as personal liability for directors. So if you want to year all about any of those topics, then head over to our website and look for episode 35. But in today’s episode, we discuss the warning signs of financial trouble, how to recognize these warning signs and what to do about them once you see them.

Hi Antony thank you so much for coming on the program today. We were talking about recognizing the signs of insolvency and the last thing that you started talking about was bad record keeping basically.


Warning! Bad Recordkeeping

Antony: Yeah, so poor cash flow was the biggest issue. It’s difficult to know what your cash position is if your financial records are disorganized or incomplete or in some cases, you don’t even understand how to read them.

Often, directors will come to me and say “But we’re doing so well. We’re making so much. Our business is thriving. We’ve got record sales this year compared to last year. But I’m having trouble actually paying all the bills. I don’t understand why.”

If you drill down a bit, sometimes the accounting procedures aren’t right. We’re getting the wrong information from the financial records or not understanding it. And it happens a lot in retail. I had a retailer, another white good type retailer, washing machines that sort of stuff. He would actually go in advertising campaigns. This was up in Newcastle. He’d go on advertising campaigns. He would actually generate all this extra sale that would come through, so he would think he was doing great.

But while he was doing that, he was selling these at less than what it actually cost him to buy it. So it was a false economy. And so in his world there was the supply of the main supplies to those of big electrical goods. They would have rebates and stretch targets and all these complex ways where they would get more money back. But it clouded the actual true cost of what it was or what money he was going to give to pay for the cost of these goods. And so the more he sold he was thinking he was doing a great thing, the more he was losing. But the day of reckoning always comes when there’s not enough money in the bank account to actually pay all your bills. So when you see that, you got to start wondering something is wrong. And sometimes to some of those people, even not having enough money in the bank can be masked as well because your banker will actually lend you more money so your overdraft gets bigger and bigger and bigger, then their day of reckoning doesn’t come until the bank manager says well you’re actually limited in your overdrafts, so we’re not gonna give you anymore.

Had these guys had proper financial information at the very beginning, they wouldn’t even allow the overdraft to get to that point. They could have actually taken corrective action earlier. So financial recordkeeping is critical to know where you are.

Good growth vs Bad growth

Joanna: Because I think the other element in this that I sometimes see is directors or shareholders then starting to tip in more money to the business, because they have this underlying belief that the business is growing and that anything that is growing is good without taking the right financial advice to really understand if they’re growing in the right way.

Antony: You’re right. You can have good growth and you have bad growth. Now they’re not technical terms. That’s just something really simple.

My washing machine retailer was having bad growth for the life and he thought he was doing really well. The signs that a business is growing puts pressure on the cash flow of that business. So when you have businesses that are growing, they do get similar signs of cash flow pressure as a business is actually struggling or shrinking. So that’s another reason why the directors ask for help. He’s going,” look this month we turned over a million dollars in sales whereas last month was 800,000. And our forecast for next month is 1.2. We’re doing very well. It’s very easy to sell things below cost. Customers will find you when it’s below cost. The trick is to be able to sell things.”

These things are sort of symptoms rather than causes. So a symptom would be is that you haven’t got any money to invest in repairs or maintenance. “Oh yeah. We can’t afford to service the big G9 Caterpillar. We’ll do that next month when it’s due.” And then what happens is you don’t do those services and then all of a sudden the engine blows up and you are up for your expense.


The concept of having enough

Joanna: And that’s true of many; I guess not just of equipment in the business but also looking at the elements of the legal foundation of the business of building other aspects of the business as well and the protection around those other aspects. It’s that not having the money to invest in building the right infrastructure around your business as it grows. I guess there are other possible indicators, aren’t they?

Antony: There are and it comes back to this concept of making sure you can sell your product or your service for enough to cover the cost of that plus the actual costs of the infrastructure that you need to be able to put you in the environment, whereby you can provide that service or product.

Sometimes this is a sign when someone’s leaving it really towards like 11 or 10 minutes to midnight. The bank will start knocking on the door. Now the bank won’t knock on your door in the early days because they’ll think things are okay and they won’t be there when the early signs come about. They’ll be there towards the end when it gets very serious, because the bank will be worried about their own personal position.

So the bank won’t be doing you any favors. They’re looking to make sure that they don’t lose any money. They’ll let you run up until that limit and then, when they start seeing you hitting the limits that you have, they will start bouncing some of your checks, or they’ll tell you your overdraft limit is approaching, or they’ll see that they didn’t go default on some your loan or interest payments. That’s a clear sign that you should ask somebody straight away, where am I really at, giving assessment for where your business is really at and if you can. You can identify where leakages are and then you can rectify those. And with prudence, hard work and a little luck you can actually avoid the disaster.

The concept of overexposure

Joanna: I guess another one that occurs to me that I see sometimes that sets alarm bells off for me is when we have clients that have over exposure to a large amount of money that they’re owed from one particular client or one particular group of clients, because I think it’s also important for business owners to recognize the possible insolvency signs or signals from their clients, because that’s a big issue for them if their clients end up having to be wound up and they end up with five cents or 10 cents in the dollar for money that’s outstanding to them. So from my perspective that’s certainly one thing that for us is a warning sign when we’re dealing with clients.

Antony: Absolutely. And it’s very common in the construction industry. So you have a subcontractor who does work for a builder and he will have a too high concentration of just working for that builder. Now if that builder is doing work for a developer and that developer can’t pay the builder, that builder can’t pay the subcontractor and then the subcontractors actually lost 80 percent or even more of what he’s owed. So the subcontractor needs to keep an eye on making sure that that builder is making his payments regularly and so he doesn’t get too far behind. When he starts falling outside of normal business terms, if he says “I’ll pay only once every fortnight or only once every month” or whatever it is, you can’t let a month go where you don’t paid. Because if you let that one month go, he won’t pay that month. He’ll give you an excuse not to pay the next month and then all of the sudden it’s straight three months. And then you’ve got three months in.

Joanna: Yeah, exposure.

Antony: Yeah, that’s right. And it’s very difficult to say no because you’re doing the work and that’s what you are. You’re a trader. You’re an electrician. You’re a piler. You’re a concreter. Whatever it is, that’s what you do. And so you’re happy doing what you do thinking that everything’s going to be okay. But if you’re doing that and you don’t get paid for it and you have to find the money to pay your suppliers, your employees, you actually lose out.

That subcontractor would’ve been better off saying to the builder “No I’m not doing any more work.” and then taking the month off to try and find another builder to get more jobs to go do work somewhere else. So he might miss one month. But if he continues to do that work, not only is he not going to get paid, he’s also ensuring liabilities that he has to pay others. So if he takes that one month off and he’s not doing any more work, he’s not incurring that extra. He’s not getting any money coming in, but he’s not going backwards on the other side by having incurring debts to pay others.

So then that month that he’s got off, he’s gone and found himself a new builder that he could work for that will pay him which is longer term. So you had one hiccup of one month rather than the guy who goes “I’ll just work for three months” and all of a sudden (bam) the builder goes down, he goes down.

Joanna: Yeah I think that’s a really important point. So it’s really about being the squeaky wheel and if your squeaky wheel isn’t working then getting the hell out of there to other clients that are paying. And I think one of the things that I often see as a warning sign is when we’re seeing payments coming into our clients that end in round figures when invoices aren’t being paid in full and we’re seeing part payment which often then means they’re round figures rather than the actual invoice amount. So I think that’s also a warning sign that we sometimes see.

Antony: That’s right and then that by itself is not necessarily cause for extreme alarm if I can say it that way. If that’s one client out of your portfolio of 20 or 50 or 100 or whatever you might have, that’s OK. You can carry that. But if that’s your one and only customer, (bang) you actually have to understand there’s going to be a problem and that problem is almost like a virus. His contagion is going to infect you and you’re going to suffer.


First, talk to your accountant

Joanna: When businesses are at the point where they’ve identified that they probably need to get external help or someone else to just have a look and see whether their strategies that they should be putting in place, where’s the first place that you would normally start?

Antony: If I’m the owner, I would actually start with my accountant. And my accountant should have a relationship with someone like us. If he doesn’t, by all means they can contact us. We’re more than happy to help with the accountants and help with the business owner. The accountants, they shouldn’t be scared of that conversation either, because sometimes it is a difficult conversation to have. No one likes to talk about failure. No one likes to be challenged with severe consequences. And sometimes these directors are very time consuming when it happens because it’s important and it’s complicated and you’re dealing with a lot of unknown things and you’re dealing with a lot of noise as well. It can be a massive distraction.

So for the accountant their best role is to actually just identify “Yes, this needs some expert help and then from that point in time get in touch with us or someone like us to actually refer the client to come over to us and we’ll have a look and then we’ll take it from there”. Working with the accountant and when we’re finished,these guys have been recovered they go back to the accountant and the accountant actually has got themselves a client that will continue into the future. Because if the accountant gets caught up in this, it’s not their day to day thing so they won’t do it as efficiently as what we would be.

There would be a massive drain on their attention and their limited time. They wouldn’t be able to devote enough attention to the other clients that they have. And often times that goes unpaid. And if it’s unsuccessful, they don’t get their money for the extra hours they put in.

It’s almost like if you’re a parent, you’ve got a number of children. There’s generally one child that requires more parenting than the others. They just take up more time and they’re more demanding. And in this case the accountant has that particular client who just requires more attention.

Joanna: And the stakes are so high for them with these types of clients aren’t they? Because I mean it’s a really emotional time for business owners when they’re cash strapped, when there’s this risk of losing their business. The stakes are high for the accountants particularly if they’re not 100 percent sure that they know the best course of action for their clients.

Antony: And they can get drawn into this. It could just start off with a simple conversation and then it goes to another bit then all of a sudden the client is ringing three, four, five times a day every day. What should I do here? What should I do there?

Not trying to alarm the accountants but they potentially, in extreme circumstances, could be regarded as being a shadow director. The director keeps coming “I’ve only got 50 grand this month. I’ve got 100 grand worth of people I’ve got to pay. Which one should I pay first?” The accountant goes “Here is your schedule. Do this one. Do that one. He is really acting as a shadow director.

Why would he put himself in that position? Because if he is a shadow director he’s personally liable. It’s unlikely, I admit, but it’s possible. And it doesn’t make sense for the accountants either. It doesn’t make good business sense for that particular accountant to put himself into that position. He’s better off saying “Go and see these guys, like go and see DVT. They actually are skilled in the theme. They know what to do. They’ll show you the way forward.”

Joanna: Have you seen any examples of accountants dealing with business owners for too long and holding on too long before they come to you and then you finding that essentially there were issues with the approach that could have been resolved if you had gotten in earlier.

Antony: When somebody comes to us our approach is – what’s the issue? What are the alternatives? Let’s work out a solution. We don’t really point the finger going “Well, had you done that, it could have been this way and that person over there shouldn’t have said what they said. So I just put it into the broad category that they came too late, rather than sort of saying the accountant waited too long. The accountant will know themselves whether not actually carried on an area that they went too far down the road and they were no longer adding value to that particular business. It’s hard to say, Joanna. Just thinking about the 20 on years we’ve been doing this, I can’t think of one where I could say yeah the accountant actually misled them. We’re just not that judgmental. It doesn’t actually help in the solution.


The boiling frog syndrome

Joanna: Yeah I get it. I guess I’m just thinking from an accountant’s perspective it’s always useful to help understand where the line is because it’s not a clear line, is it. It’s a gray line and it can sometimes be helpful I presume for  accountants who aren’t specialists in this area. There’s a lot of elements of ‘you don’t know what you don’t know until you realize you don’t know it’. So I guess it’s just about are there things that we can communicate to the accountants who are listening here that to help them in working out where this line is when they really should be moving it out to someone who’s an expert in the area.

Antony: It’s almost like the, have you heard the boiled frogs syndrome?

Joanna: I have. I have.

Antony: OK. For anybody listening who hasn’t, it runs like this. If you took a frog and put it into a pot of boiling water, that frog would jumped straight out, like any reasonable person would do. But if you actually put the frog in a pot of cold water and then slowly turn the heat up it will happen so gradually that the frog ends up not realizing and ends up being boiled.

So the accountants actually starts off with great intentions. And it’s his client’s, and he’s probably even his friend. He’s been with him for quite a while. And little bit by little bit he just gets pulled further in and further in. The accountant will know when he starts to feel, when the phone call comes in and he goes “Oh gosh, it’s Sam again.” He’ll know. He’s like “Oh, what am I gonna say to him this time? Or have I said it before?” He will actually realize at that point. So at the beginning of that sort of that feeling, that’s the time he’s got to go, “mate, Sam it’s time you go and speak to DVT or somebody similar. And I know these guys, they’re really good. Give them a call. We’ll go over together or we’ll get them to come over here and see us and we’ll tell him what the situation is and they’ll just tell us straight right there, there and then what it is that we should or what our options or what our alternatives are”. When something’s broken, it doesn’t get better by itself.

Joanna: And that’s the fundamental point. I think that’s really a really good point. And so I guess we’ve covered some really interesting topics here today and important topics for business owners and accountants who are working with businesses. Are there any sort of parting last ideas or thoughts that you have in terms of what our business owners need to know to avoid solvency or their accountants.

Antony: Just recapping really Joanna, it’s a case of know where you are at financially. So have good financial information and it doesn’t have to be complicated. It doesn’t have to be complex.

I notice when we do work with businesses that are doing really well and we help improve, a good business owner will know the key drivers of the business. He will know if we sell 35,000 dollars this week for reconditioned engines, we’re in front. Very simply, he’ll be able to know what those numbers are because behind that he knows how much it costs him to actually keep the doors open, how much it costs to run the business.

And so for the business owners is to know where you are financially, if you need your accountant to help you find those key information go through that, if you actually are feeling like you haven’t got enough money to pay everybody and that’s happening maybe for one two three months, it’s time to put your hand up and have that conversation with the accountant.

The accountants out there should actually (they may not see the guys businesses once a month or every quarter or thereabouts) but they could have the conversation. “How’s it going? Do you feel like you’re doing all right? Or do you feel like you’re falling behind?” And then if they are falling behind, just drill a little bit deeper and get help. Seek some expert opinions, expert advice or someone who’s got more experience in this area sooner rather later.

Sooner rather than later gives you alternatives and alternatives gives you a greater chance of success and it is possible to come out through the other side stronger than what it was before you went in.

Joanna: Great example is what you talked about right in the beginning about your business owner that 14 years later is five times more. I think that’s such a good example of the benefit of getting in early.

Antony: Yeah absolutely. OK.

Getting in touch with Antony and DVT Group

Joanna: Excellent. Wonderful. Thank you so much for your time Antony! If people want to contact you, how do they get you? Do you have a website? Where should they go?

Antony: Yeah there’s a website. It’s dvtgroup.com.au and the phone number here in Sydney is 96 333 333. We’ve got five partners. Any one of us can actually help out in any shape or form when someone might want to ring in and ask. We’re here to help. We’re not here to threaten. We’re not here to sort of poach any accountants’ clients because we don’t do any of the traditional accounting work. We don’t do PNLs or BASs or tax returns or orders or any of that sort of stuff. So our relationships are very transactional with people. And we like to collaborate. Often times we can get the accountant. The accountant can learn from the experience of working with us as well.

Joanna: And I presume that then is potentially a really big value add for them as well. All of the things that they learned that they can then pass on in the interactions with other clients into the future.

Antony: Collaboration is a big word for us and we like to find people that have similar value sets to what we do and we find that when we collaborate together, everybody succeeds and when everybody succeeds everyone is happy. That’s not a complicated formula and it’s one that’s worked really well for us for the last couple decades.

Joanna: Fabulous. Well look thank you so much for your time. I think you’ve covered some really important issues here today and hopefully we’ll have you back in another episode later on at some stage talking about perhaps turnarounds maybe we can talk a little bit more about turnarounds into the future.

Antony: I’ll be happy to Joanna that would be great. Thank you very much. Thank you.

Joanna: Thank you.


Quick recap 

Joanna: Well that’s it for our two part series all about recognizing and acting on the signs of insolvency with our special guest Antony de Vries. I very much enjoyed this discussion today with Antony because it really hit on the human aspect of this area of the risks of company insolvency. And it highlighted some great examples of practical steps that business owners and accountants can take to help avoid the risk of insolvency of the business, and what to do when that risk is calling on the door.

So just a quick recap of what we covered in this second episode of the series. We discussed the many warning signs for businesses and for their accountants in recognizing trouble brewing before it’s too late. We also discussed the many benefits of getting help from professionals early in the piece. 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 download a transcript of this podcast episode if you’d really like to read it all in more detail. There you’ll also find details of how you can contact Antony and you’ll also find details of how to contact our lawyers at Aspect Legal if you like help with any of the items we covered today.

So thanks again for listening into this two part series. You have been listening to Joanna Oakey and Talking Law. See you next time.