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Be aware of the indicators of insolvency for both your business and your customers

When looking forward it is important to be aware of a number of factors that indicate potential insolvency.  Being aware of the indicators is relevant to your own business and also some of the indicators when displayed by your customers should alert you of a potential insolvent customer.

If you become aware of any of the indicators you need to seek advice about the best way to deal with the debt.

Insolvency Key Indicators

In ASIC v Plymin (2003) 46 ACSR 126 a checklist of 14 indicators of insolvency was discussed.  The 14 indicators were identified as:

  1. Continuing losses;
  2. Liquidity ration below 1 (Measures the extent in which liquid assets are available to cover debts);
  3. Overdue taxes;
  4. Poor relationship with current bank ie unable to borrow further funds;
  5. No access to any alternatives finance options;
  6. Inability to raise further equity capital;
  7. Suppliers placing the business on COD or demanding certain payments before supply;
  8. Creditors unpaid outside trading terms (important to have a system in place to follow up unpaid invoices including cash flow collection);
  9. Issuing of post-dated cheques;
  10. Dishonored cheques;
  11. Arrangements with certain creditors;
  12. Solicitor demand letters, legal claims, judgments or warrants issued;
  13. Payments to creditors in rounded lump sum amounts rather than specific invoice amounts;
  14. Inability to produce timely and accurate financial information.
Indicators of Insolvency

If your business is experiencing a number of the above indicators seek advice as soon as possible.  It may well be a short-term cashflow problem that with the right advice can be overcome.

There are some simple steps you can take to reduce the risks and become aware of the indicators that your customers are struggling:

  • Speak to your customers regularly;
  • Have a cash flow collection process in place to ensure invoices are not paid outside of terms;
  • Subscribe to a creditor service that alerts you to any changes to your customers ie insolvency events, Court judgments etc;
  • Ensuring your accounts department are aware of the 14 indicators.

Thanks to our ‘legal eagle’ Craig Mason from Streten Masons Lawyers for this article.