How to avoid your business collapsing after three years

Roger Mendelson

Business insolvency is a very real risk for Australia’s more than two million small businesses.

According to the Australian Bureau of Statistics, approximately 60 per cent of SMEs won’t make it past the three-year mark.

In some instances, this is down to a business idea not being fully thought out. However, most business operators have realistic business plans. Why, then, do so many Australian SMEs collapse, and how can you avoid your business becoming another statistic?

Here are some simple tips to help your business thrive, and reduce your risk of insolvency.

Look for warning signs

Pay attention to how your business is performing. As a business owner, it’s easy to get caught up in the day-to-day operations, forgetting to make the time to assess how you are performing financially. If the bank is bouncing your cheques, suppliers are pushing you for payment and you're finding it hard to get credit, treat this as a sign that you need to take action. If you have a bookkeeper who manages your finances for you, take an interest and be more involved.

Focus on cash flow

Cash flow is the lifeblood of any business. If your clients aren’t paying their bills, it puts a strain on your entire business and can limit your growth. Implement a solid billing and debt collection system, get invoices out promptly and follow them up regularly. If you're granting credit to clients, ensure you have trading terms in place and enforce a 60-day payment cycle.

Don’t rely on lenders

Ensure you have sufficient capital to run your business. With low growth expected to continue next year, banks are moving out of SME lending so businesses will need to become more self-sufficient. If you do get a loan, expect to pay at a much higher interest rate.

Don’t rely on your bank balance as an indicator of the financial strength of your business.

Stay on top of your payments

When creditors become more demanding, you could be headed for the business “death spiral”. You need to make sure you pay your own debts or, at the very least, organise a payment plan. All it takes is one creditor to sue you and, if you don’t have the money to stave them off, a judgment will be taken out and signal to your other suppliers to withdraw their credit and put pressure on you to pay their own overdue accounts. If you aren’t keeping on top of your debts, things can get out of hand very quickly.

Don’t be afraid to ask for help

Don’t rely on your bank balance as an indicator of the financial strength of your business. It’s important to have a good accountant or bookkeeper to give you an impartial assessment of your situation. If you find yourself heading for trouble and bills are piling up, seek help from an insolvency accountant. The earlier you do, the increased likelihood of navigating away from disaster.

If you do this, you have a better chance of being one of the 40 per cent of businesses that make it beyond the first three years, and you will prosper and grow.

Roger Mendelson

Roger Mendelson is CEO of Prushka Fast Debt Recovery and principal of Mendelsons National Debt Collection Lawyers. Prushka acts for in excess of 53,000 small to medium size businesses across Australia and operates on the basis of no recovery – no charge. Roger is also author of The Ten Mistakes Businesses Make and How to Avoid Them and Business Survival, both published by New Holland Publishers.