Back in 2004 we wrote a series of articles on a list of 14 indicators of insolvency listed in a decision in ASIC v Plymin. We have recently been asked to prepare some information on these indicators in a way that non-accountant business owners can understand them. That led us to look at these indicators and try to simplify the list by placing these indicators into several categories. The original list from the judgment is:
The 14 indicators are:
1. Continuing losses.
2. Liquidity ratios below 1.
3. Overdue Commonwealth and State taxes.
4. Poor relationship with present Bank, including inability to borrow further funds.
5. No access to alternative finance.
6. Inability to raise further equity capital.
7. Suppliers placing [company] on COD, or otherwise demanding special payments before resuming supply.
8. Creditors unpaid outside trading terms.
9. Issuing of post-dated cheques.
10. Dishonored cheques.
11. Special arrangements with selected creditors.
12. Solicitors’ letters, summons[es], judgments or warrants issued against the company.
13. Payments to creditors of rounded sums which are not reconcilable to specific invoices.
14. Inability to produce timely and accurate financial information to display the company’s trading performance and financial position, and make reliable forecasts.
We firstly put the 14 indicators into 3 groups:
- Financial statement indicators – indicators related to the paperwork and the information available from that paperwork
- Cash Flow indicators – indicators related to the availability of money
- Creditor Relationship indicators – indicators related to dealings with creditors and what signs should be noticed from these dealings
We then looked to the individual indicators to combine ones that could be effectively explained together. We ended with the following list:
Financial Statement Indicators
Continuing losses and working capital
A lack of timely and accurate financial information
Cash Flow Indicators
An inability to raise equity or loan capital
Issuing post-dated cheques or having cheques dishonored
Payments in rounded sums and for a minimum amount
Overdue Commonwealth and State taxes
Creditor Relationship Indicators
Poor Relationship with Bank
Suppliers demanding COD trading, or payments before supply
Creditors issuing demands or proceedings
We will look at each of these groups over the next 3 months.