4 accounting areas to proactively target.
Accountants often ask me what they and their staff should be looking for on a day-to-day basis, to determine if their clients may be experiencing signs of insolvency. It’s expressed to me on many occasions that often, by the time year-end financial accounts are prepared and presented, it is often too late.
We have created a 'Worrells Workshop' presentation on this very topic that we can present in your office. Here is a sample of the more critical elements that accountants and their team can be looking out for on a day-to-day basis with their clients.
Trade Debtors
Often the lifeblood of a business's cash flow. A regular review of the trade debtors' ledger is critical, as it is often the most significant source of working capital for a business. If debtors are not being collected this should be a red flag. Are they not being recovered because they are simply not collectable and should be written off? Are the necessary procedures for debtor collections lacking? Is there some other reason? Retaining uncollectable debtors on the debtors' ledger not only over-inflates the debtors' ledger, but gives an over-inflated measure of working capital. Debtors should either be collectable or written off.
Stock
Stock is another significant source of working capital. A regular review of stock must be done to identify stock that is not being sold, and why. Is it because the stock is old, or is it obsolete? Just like debtors, carrying unsaleable stock is not a source of working capital. Sometimes a decision must be made with old stock to write it off, or sell it for whatever price possible. Old or obsolete stock being carried in the accounts and taking up space on the premises serves no purpose.
Trade Creditors
A quick review of a creditors' ledger over a period can tell so much. Ideally trade creditors should be paid as and when they fall due. If the same creditors' balances are remaining on the ledger month after month and simply moving from 30 days, to 60 days, to 90 days, then this must be addressed; similarly, purchases being made from new suppliers when old suppliers remain unpaid. This might mean old suppliers are refusing to supply, obviously because they are not being paid. A knock-on effect might mean the client is now purchasing stock from a more expensive supplier, which affects profitability.
Australian Taxation Office (ATO)
A simple review of the ATO portal can quickly identify the outstanding balance to the ATO. We often find the ATO is the first creditor to be neglected, and yet can have the most significant of implications for the directors personally.
These are just a few of the indicators. Our Worrells Workshop—My client is in financial trouble: what now? explains these indicators (and more) in detail. The important thing is for accountants and their team to be aware of any signs their clients may be in financial difficulty; to have that discussion with their client; and to get the right advice from registered and regulated advisors such as the partners at Worrells.