Why struggling businesses should close on their own terms

The owners of struggling businesses should take control of the decision to close the business rather than wait until they are forced into it, according to RSM Bird Cameron.  

Andrew Beck, national head of turnaround and insolvency, RSM Bird Cameron said, “While the mantra for many business owners is to never give up, sometimes it can be smarter to quit now rather than hold on. By making the difficult decision to shut the business down sooner rather than later, business owners can make the loss easier on employees, shareholders and other stakeholders, as well as protect their own reputation. Everyone benefits from an early decision.”

By deciding to close the business before it fails completely, business owners are more likely to be able to fulfil their obligations to employees, including providing appropriate notice periods and payouts.  

Struggling businesses should close on their own terms
Winding up the business sooner means less time for debts to accrue interest and can make it easier to find buyers for the company’s assets. This can deliver a better outcome for shareholders and creditors.

There are also benefits for financiers who may be more likely to recoup their costs if the company is wound up before it goes into liquidation or receivership. Chasing repayment once that happens can be expensive and rarely results in full repayment due to the company’s diminished assets.

Suppliers who are made aware of the company’s impending closure can also take steps sooner to replace the income with new customers.

There are also significant benefits for business owners.

Andrew Beck said, “Being forced to wind a company up through liquidation, receivership or insolvency can be incredibly stressful for business owners. Their personal finances are not necessarily immune and, at the very least, they will receive regular and escalating calls from creditors chasing payment. They can avoid this by getting financial advice immediately and taking steps to fulfil all obligations as soon as possible.

“Business owners that wind up their businesses before they’re forced to do so can sometimes end up with a positive financial return instead of being ruined. Regardless of the circumstances, keeping an open line of communication with all stakeholders is the key to a smoother and less painful closure.”

Warning signs

There are five key warning signs it may be time to fold your business*:

1. Inability to pay debts: if your business cannot meet its obligations, then cashflow, the business’ lifeblood, is likely to be stymied. Operating without adequate cashflow is unsustainable.

2. Poor profitability: if the business is not making enough money and repeated, strategic attempts to cut costs and improve efficiency have failed, then the business itself may be unviable. Keeping a close eye on the balance sheet can let companies address these issues sooner rather than later and, if the downward spiral continues, then the business is not likely to be viable in the long term.

3. No access to finance: Banks and other financial institutions are unwilling to lend to struggling companies and their stringent application processes may uncover systemic issues long before you do. If you are struggling to secure finance for the business, you may need to consider whether the business can continue to operate.  

4. High staff turnover: this can incur significant costs for the business and is a sure sign that something is going wrong within the organisation.

5. Inadequate financial records: if you’re not keeping adequate financial records then you won’t know when your business is struggling. It also makes it difficult to see when to chase debtors and how to reduce costs.

Andrew Beck said, “These five warning signs are just the tip of the iceberg. It is vital for business owners to identify issues early and decide whether they can be rectified in order to save the business. If the company is beyond saving, then you should make that decision as early as possible to minimise the negative effects of the shutdown.”

* http://www.business.vic.gov.au/money-profit-and-accounting/financial-processes-and-procedures/five-warning-signs-solve-the-problems-before-they-happen

About RSM Bird Cameron
RSM Bird Cameron is the largest mid-tier accounting firm in Australia with national ownership and profit sharing and offers a full range of specialist advisory services, including business consulting and advisory, assurance and advisory, taxation consulting, corporate consulting and turnaround and insolvency. RSM Bird Cameron is a core member firm of RSM International, the seventh largest network of independent accounting and consulting firms in the world.