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Don't Let Your Small Business Become An Insolvency Statistic

Young businessman hiding head in the sand
Young businessman hiding head in the sand

No one starts a business to fail.

But that’s what’s happening to thousands of Aussie startups and small businesses every year.

As if it’s not risky enough to leave the safety and security of a full-time job, small business owners also risk losing their savings -- and their personal assets -- if they don’t carefully plan for times when cash flow might be slow.

The latest figures from ASIC show that 85 percent of businesses that collapsed from July 2014 to June 2015 had less than $100,000 in assets, and 79 percent had less than 20 employees, showing just how vulnerable small businesses are.

During that period, there were 8354 reports of insolvencies, with the highest occurring in the business and personal services sector (28 percent), followed by construction (21 per cent) and accommodation and food services (10 percent).

So what’s going wrong?

For the second year running, the top three reasons for insolvency were inadequate cash flow or high cash use (44 percent), poor strategic management (42 percent) and trading losses (34 percent).

Roger Mendelson, the CEO of Prushka Fast Debt Recovery, said he’d seen a lot of changes in the small business sector since he started his agency in 1977 -- but some things had remained the same, including the time of year that most businesses collapsed.

“Most businesses that fail just fail to thrive and end up being closed down, not being wound up by either the ATO or organisations like WorkCover and so on,” Mendelson told The Huffington Post Australia.

“And if you are going to fail it’s probably going to be in February-March -- that’s when you just don’t have financial resources to carry on.”

He said failing to plan for staff holiday pay in the lead-up to and over Christmas, in addition to a decrease in orders or demand for services, could drain cash reserves.

“I’m talking about those SMEs not engaged in retail or tourism here, but things generally start to slow down the week before Christmas,” he said.

“When I first went into practice in a law firm, we were very conscious of holiday pay as we closed down for three weeks over Christmas and you had to plan for it -- that was a lot of cash going out and nothing coming in.

“That feeling isn’t there any more … there’s not that talk of building up cash reserves in the lead-up to holidays. And that’s the time that the orders stop coming in and B2B drops off as people are in holiday mode.”

Prushka Fast Debt Recovery CEO Roger Mendelson helps small business manage cash flow.

He said irreparable damage to a small business’s reputation could be done in a very short timeframe.

“Once you reach that point when you can’t pay all of your bills, you only need one supplier to turn nasty and insist on being paid now for it to all go horribly wrong,” Mendelson said.

“They don’t care if they lose your business, they just want to be paid.”

He said that not being able to pay that one supplier or provider, can put your business into default, and the supplier can sue. If that happens, you have 21 days to lodge a defence, and if you don’t, they can enter a default judgement.

“That goes on your credit file and other businesses you deal with will hear about it -- by then the damage is done,” he said.

“Small companies usually don’t have the means to do that, but if you’re dealing with larger ones that’s how they work.”

Here are Mendelson’s tips for improving cash flow when times are tough:

Don’t put your head in the sand

If you have concerns about cash flow and there are warning signs such as payments being bounced and suppliers asking for payment upfront, you need outside help --- it’s crucial.

Get an accountant to come in and work out a cash flow; they’ll look at assets and payments work out a plan.

It could be as simple as working out a payment plan with suppliers, but make sure you don’t overextend.

Plan a sale

In the lead-up to your quiet time, plan a sale and get rid of your old stock.

Discount it as much as you can for cash.

Only place essential orders

When placing orders, have as a precondition that you’ll pay it in thirds -- one at the end of this month, another next month and the third the month after.

That way you’re not hit with bills that require payment after 7 days when cash flow is limited.

If the supplier is not prepared to accept those terms, look elsewhere or just place an order for the bare essentials.

Defer the rest until business picks up again.

Invoice now!

Get your invoices in order and start billing now.

Offer a 5 percent discount if they are paid within a certain timeframe to bring in the cash.

If they are in a position to, they will pay earlier to save money and your cash flow is enhanced.

Now’s not the time for new office equipment

Defer any non-essential purchases until well after Christmas, you just don’t need those bills now.

Chase debtors

If you have any accounts that are more than 60 days overdue, outsource them to a debt collection agency. Also have them chase any debts you have written off.

“When they write off a debt, which they would do in June each year, many small business don't realise you can still pursue that debt for up to 6 years,” Mendelson said.

“We have had quite good results in that area and we only charge on results, so there’s no harm in having a firm like ours pursue it if it’s been written off anyway -- and that may be a quick form of cash you hadn’t counted on.”

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