By recognising the warning signs of insolvency and implementing strategies to minimise risks, accountants, owners and managers may potentially avoid business failure and take steps to minimise personal risk.

To determine whether a business is insolvent, a number of factors must be considered. Accountants, owners and managers need to assess their solvency and the following factors should be considered when making that assessment.

1. Business aesthetics
Not all indicators of insolvency may be found on a spread sheet. A tell-tale sign may be the ‘look’ of the organisation itself. A prosperous business is in a position to spend more on the upkeep of its premises. It stands to reason that if a business is struggling, it will not be able to divert funds to the maintenance of its premises.

Similarly, employees may provide an indication of the business’ success. Staff are usually aware of how successfully a business is operating, and their mood can reflect this. For example, a successful business may have happier, more productive employees, while staff morale would be low where a business is struggling.

2. Insufficient and inaccurate books and records
Section 588E(4) of the Corporations Act 2001 (Cwlth) states that “if a company does not keep comprehensive and correct records of its accounts and financial position, or if it does not keep records of a transaction for seven years after its completion, then that company will be presumed to be insolvent during the period to which the records relate.”

During tough times, owners and managers of a business may not focus on maintaining their books and records however, it is essential that these be maintained to avoid the statutory presumption of insolvency.

3. Forecasts and plans
Every business requires a detailed budget and cash flow for the coming financial or calendar year. Without these, business operators are unable to monitor results or make useful planning decisions. Any budget and cash flow must be based upon a logical and informed interpretation of data.

4. Dishonoured payments
Withholding of payments to creditors, bounced cheques and dishonour fees are good indicators of a business’ inability to keep up with payments when they are due and payable, or within the terms of trading agreements. This may be symptomatic of a business that is struggling to make ends meet, particularly where such payments are related to unpaid taxes or other statutory liabilities.

5. Increased aging of creditors
Any overall increase in the time that it takes to make payments to creditors can indicate that a business is struggling financially and may have limited cash flow to meet payment obligations.

In this situation a business may prioritise paying some creditors over others with large lump-sum payments, or choose which creditors to pay on time and which to pay late, depending on its need for the respective supply. These strategies may suggest that a business has had to ‘tighten its belt’ by restricting available funds and making payments to essential suppliers first to maintain trading operations.

6. Altered credit terms
When a creditor’s payments are continually delayed, creditors may respond by altering their trading terms with a business. For example, a supplier might reduce trading terms, enter into a payment plan to enable the business to pay an overdue account, or place them onto ‘cash on delivery’ terms until any outstanding amounts are satisfied.

These actions indicate that a business is no longer able to satisfy its debts as and when they are due, and that it is clearly experiencing financial difficulty.

7. Delay of tax payments
As detailed above, businesses with limited available funds may choose to prioritise certain payments over others. This might include paying the most essential supplier first. Often, payments of statutory taxes such as PAYG and GST are delayed as they do not immediately affect the operations of a business. In the short term, this delay may improve a company’s cash flow.

Recent amendments to the Director Penalty Regime (see Summer 2012 Client Information Bulletin) mean that directors may be held personally liable for outstanding PAYG withholding tax, should the amount have not been reported and be in excess of three months of the date on which it was due.

Consequently, non-payment of such tax by a business would be considered a strong indicator of insolvency. A business may enter into a payment plan with the ATO to repay PAYG tax, which only confirms insufficient cash to meet business debts as and when they fall due.

8. Delay of superannuation contributions
In an effort to improve short term cash flow, a business may delay the payment of its employee superannuation contributions. As these contributions are usually paid quarterly, overdue amounts may not be recognised as such until some time after the due date.

As with delayed tax payments, delayed superannuation contributions may indicate that a business is struggling to manage its cash flow. The amendments to the Director Penalty Regime mean that the director of a company may now be held personally liable for unpaid superannuation contributions in certain circumstances. Consequently, non-payment of superannuation contributions by a business would also be considered a strong indicator of insolvency.

9. Bank overdraft limit reached
An indicator of insolvency is whether a business regularly trades at or close to its overdraft limit. If a business regularly trades at its overdraft limit, it means that there will be little to no emergency funds available should they be required.

10. Legal action
Legal action issued against a business will result in the business incurring the financial cost of defending any claim. This would impact future cash flow and should be taken into account when preparing budgets and cashflow forecasts. Obviously, unsatisfied judgments which have not been appealed would indicate insufficient cash flow to satisfy debts as a when they fell due.

If a business is faced with one of the following three things it would ordinarily be considered insolvent:

• a winding up notice
• a statement of claim relating to unpaid accounts
• being issued with a director penalty notice.

If you are seeing these warning signs talk to your Chartered Accountant to discuss the options.

Tax returns and tax laws become more complex year after year. Fewer people each year are able to file their individual returns without a little tax planning and assistance from a tax accountant.

The title ‘Financial Advisor’ carries many connotations, but, in a nutshell, what they do is simple. They offer advice. Not just any advice, mind you. Top notch financial advisors stay ahead of financial news and trends, and they offer tangible, valuable advice that can help you grow your retirement fund into something you never imagined it could be, as well as help prepare you if life takes a difficult turn. Let’s take a look at some of the ways the financial advice of a financial advisor can help you.

Regardless of how long you have maintained your relationship with your accountant, and regardless of whether you have a personal or business accountant, or both, it’s wise to step back and assess him or her on occasion. After all, you have entrusted this person, or business, with your finances. Here are a few things to key in on when evaluating your relationship with your current accountant.

The small business instant asset write-off threshold has been increased from $1,000 to $6,500 for the 2012-13 income year. This means the long life small business pool and the general small business pool have been consolidated into a single pool to be written off at one rate.

These amendments only apply to small businesses that have an aggregated turnover of less than $2 million. An accelerated deduction can also be claimed for motor vehicles costing $6,500 or more under the same provisions. The cost of the motor vehicle is added to the general pool but unlike other assets, the deduction is $5,000 plus 15% of the remaining amount.

For example if you purchase a vehicle only used for business purposes for $12,000 in the 2012-13 income year you can claim the following:

• $5000 + 15% (12,000 – 5,000) = $6,050

If the motor vehicle costs less than $6,500 it can be immediately written off. For more information on these depreciation rule changes talk to your Chartered Accountant.

Businesses in the building and construction industry must now report the total payments they make to each contractor for building and construction services each year. This change came into effect 1 July 2012. These payments are to be reported to the ATO as part of the Taxable payments annual report.

Who Needs To Report

• Businesses in the building and construction industry will need to provide the report if all of the following apply to them:
• The business is primarily in the building and construction industry
• Payments are made to contractors for building and construction services
• The business has an Australian business number (ABN).

A business is considered to be primarily in the building and construction industry if any of the following apply:

• In the current financial year, 50% or more of the business income is derived from providing building and construction services
• In the current financial year, 50% or more of the business activity relates to building and construction services
• In the financial year immediately before the current financial year, 50% or more of the business income was derived from providing building and construction services.

Details To Report
For each contractor the following details will need to be reported each financial year:

• ABN (if known)
• Name
• Address
• Gross amount paid for the financial year. This is the total amount paid inclusive of GST.
• Total GST included in the gross amount paid.

When To Report

The first Taxable payments annual report is due 21 July 2013 for payments made in the 2012-13 financial year. In this first year, if the activity statement is lodged quarterly, it can be lodged by 28 July 2013.

Tax planning is one of the most confusing and overwhelming aspects of being a business owner. It’s also one of the most critical. Anyone who has ever tried to go it alone can tell you that a simple mistake, which is made easily by a nonprofessional, can cost endless hours of additional work, not to mention the added financial burden that the errors place on you.

We would all like to think that we know what’s best for our businesses, our futures and ourselves. However, in the sticky, tangled world of finances, one really bad decision can ruin a lifetime of work. A financial advisor can help you navigate through the tricky moments by offering knowledgeable, real world financial advice in the moments when you need it most.

If you need to hire a company accountant, but want to ensure that you are hiring the best, then strongly consider hiring a chartered accountant. Not every accountant has the same skill set and level of training, and not every accountant can become a chartered accountant.

The Government announced its intention to limit the allowable deduction for self-education expenses by individual taxpayers. From 1 July 2014 it will be capped at $2,000 per annum.

The limit will apply to all self-education expenses such as tuition, books, courses, computer equipment as well as travel and accommodation relating to things such as seminars and courses.

The proposal is far reaching and will impact individuals wanting to improve their professional qualifications. Small businesses can continue to help staff with additional training and skills by offering to pay for any courses or tuition for staff making them exempt from the caps. However if staff salary sacrifice to pay for training courses it will be considered a fringe benefit and subject to fringe benefits tax.