080 – What to know about Insolvency with Lee Crosthwaite

Insolvency is a dirty word for anyone in business.  But there is always a risk that you will have to wind-up your business because of a lack of funds.  Today, were joined by Lee Crosthwaite a partner at Worrells Solvency and Forensic Accountants.  He’s a registered liquidator and has worked at the firm since 2002.  He has been involved in administering a number of high profile bankruptcies in Australia.  He has a lot of great insights into what an insolvency practitioner does.  We also discuss how business owners can turn their business around and avoid insolvency.

Lee says working in the industry can be difficult as he has to deal with people during one of the most difficult times in their lives.

“You have to have a lot of compassion for the people involved.” He says.

There are several stages to the insolvency process.  An individual may become insolvent and so to can a business. A company is in the early stages of facing insolvency is very different from a company that is heavily insolvent.  You have to deal with those situations in different ways.  Early on the focus is on trying to turn around the business, usually through the restructuring of debt.   The other aspect of insolvency is when the company is on its last legs.  A creditor may have wound up the company through the courts.  At the at point Lee’s work is all about liquidating the company assets and paying employees and creditors.

There are a lot of misconceptions about the insolvency process.  The most common is the idea that no one gets paid during a bankruptcy.  That may be true at the very late stages of insolvency.  But if a turn around process begins early enough that outcome can be avoided.

There are a lot of mistakes business owners can make that could lead to insolvency.  The biggest is, of course, financial mismanagement.  Not having proper budgets or up to date financial information is a very common error that Lee encounters.  Not having up to date financial information means the owner may not know things are going wrong until it’s too late.  Having enough capital on hand is also critical.  Many people start a business without enough capital and are never able to catch up.

You have to have a good business plan if you’re going to succeed.  Understanding your target market and you ability to head in the right direction is critical.  There are excellent accounting programs available to ensure that your financial information is up to date.  Making sure you’re balancing you cash flow against your expenses and creditors is also key.  If you do start to struggle you need to deal with it immediately.  Keep your bank, your employees and other creditors informed throughout the process.  The earlier you start trying to the fix the problem the more options you will have.

If you get to the point in your business where you are starting to have trouble seek advice. Whether it’s a lawyer or an accountant do it.  Don’t put your head in the sand.  When you’re going into your business make sure you have an exit strategy.