I recently wrote about the warning signs of insolvency and thought it was worth sharing what I see most often when things go wrong.
With insolvency numbers now above pre-COVID levels, it’s time to look again at the five common reasons (or at least the common themes) why a business fails.
The first observation? These things don’t creep up slowly.
Too often, I see good people running good businesses, but they let small things slide until they snowball into cashflow pressure, ATO arrears, and eventually, a call to me.
None of what I mention in this article is rocket science, and it’s all on our radars to review as business owners, but after 26 years in the game, these issues still show up in almost every insolvency I handle.
1. Poor cashflow management
Profit is important, but cashflow is critical and keeps a business alive. A business can show a healthy profit and still run out of money.
Why? Because the P&L only tells part of the story. It shows what has been earned and spent, but not what is actually available in the bank.
It won’t tell you:
How much to set aside for BAS, PAYG, or super.
How much cash you will need to fund that next project or sale.
How much is going out each month for finance repayments, asset purchases, or director drawings.
All of those things chew through your cash, and once the cash runs out, everything stops. This is where a lot of businesses come unstuck. They make decisions based on profit, not cashflow.
The two aren’t the same thing, and if you don’t plan for the ups and downs of cashflow, profit means nothing.
Tip:
Run a simple 13-week cashflow forecast and include every outgoing: loan repayments, leases, tax, drawing everything.
This is the picture you need to consider that will allow you to better plan working capital requirements for your business, especially for new larger projects.
If you struggle with the difference between a cashflow and a P&L, sit down with your accountant or bookkeeper and get the help you need.
2. Lack of financial awareness and not pricing correctly
Many directors of struggling businesses don’t really know how their business is performing until it’s too late. They assume their accountant will warn them if something is wrong, but that is not their job.
I often see businesses trading insolvent for months because no one was watching closely enough, or the figures were wrong.
Too often, businesses quote and set prices based on what competitors charge or what “feels right” rather than what is needed to make a profit.
Common issues include:
Not knowing true job costs – forgetting overheads, admin, finance costs, or owner wages in pricing.
Overreliance on one big client – doing anything for the one big client – irrespective of the impact on the business
Weak margins – chasing turnover and staying “busy” while profits disappear. Not knowing what it costs to make a widget or deliver a job?
It reminds me of the old blues song One Bourbon, One Scotch, One Beer.
The singer works hard all week, still can’t cover the rent, and ends up at the bar trying to forget the problem. That is what under-pricing feels like… plenty of effort, no reward, and wondering where the money went.
Tip:
Work out your break-even point. You need to know what it costs just to open the doors each month, including rent, wages, insurance, tax, and your time. Thereafter, build your pricing from there, not from what it costs to win a job.
If you don’t understand the numbers, ask your accountant or bookkeeper to walk you through them.
3. Uncontrolled growth and buying unnecessary assets
Some of the biggest collapses I have handled were growing businesses.
On paper, they were booming, more work, more staff, but the cash was disappearing fast.
Growth eats cash. More stock, more wages, more rent, and all before you even start issuing invoices and generating cash.
And when things are busy, it’s easy to justify buying new gear, vehicles, or assets that the business doesn’t actually need.
I’ve seen directors take on huge contracts chasing “turnover” only to find the profit was paper-thin.
Opportunities are good, but they need to be assessed through the lens of profit and cashflow (see points 1 and 2). Before making big decisions, check the numbers. Then check them again.
Also, when revenue rises quickly, there’s also a temptation to go toy shopping, buying a new ute, caravan, or boat, thinking the business can “afford it” because sales look strong.
Here’s the reality:
Wait until your business is consistently profitable, generating surplus cash, and has a healthy pipeline of work. When you can save $100,000 and are genuinely prepared to throw it on the ground and set it on fire, then consider buying that Ram 2500, boat, or caravan.
Until then, that money belongs in your working capital, not on the driveway
Also, always remember if you are financing a purchase, those capital repayments don’t show up on your P&L, but they drain your bank account just the same.
Tip:
Before saying yes to the next job or big purchase, ask yourself:
"If sales doubled tomorrow, could I fund it, and would it actually make more profit?"
If not, slow down. Growth should strengthen your business, not strangle it, and remember to think before you buy.
4. Ignoring the warning signs
Most directors know when something’s off. You can feel it long before the numbers confirm it.
The late nights. The quiet worry. The juggling of who you pay this week.
But pride, fear, or fatigue make it easy to delay the hard calls. It’s human nature to hope the next job, the next month, or the next deal will fix it.
Sometimes it does. Most times it doesn’t.
I often hear:
"We just needed one more job.”
“Once the ATO plan was approved, we’d be fine.”
The truth is: time is the enemy. The longer you wait, the fewer options you have. Acting early can be the difference between saving a business and losing everything.
Getting advice doesn’t always mean liquidation. It might mean restructuring, negotiating with creditors, or simply confirming that the business can still be turned around.
And sometimes, yes, it means closing the doors, but doing it properly, before the stress, the debt, and the personal risk spiral out of control.
Tip:
If you’re losing sleep over cashflow, that’s your signal.
Getting advice early isn’t failure. It’s leadership.
5. ATO and Compliance Neglect
The ATO is the biggest unsecured creditor in most liquidations, and it’s almost always avoidable.
The pattern is familiar: lodgements stop, debts build, and then the director penalty notices (DPN's) arrive. Usually by this stage, options are limited, especially if cash has run out and profitability has disappeared.
It often starts with good intentions. Cash gets tight, and the ATO becomes the “accidental bank.”
Directors tell themselves it’s just for a month or two, but sometimes it never is.
Soon, BAS lodgements fall behind, super stops being paid, and the hole gets deeper.
Remember: GST, PAYG, and super isn’t your money. They belong to the ATO and your employees.
Treating them as cashflow is like taking a cash advance, short-term relief, long-term pain. This saying is also applicable to using those short term cash loans as well.
And here's the thing: if you’re managing cashflow well and pricing correctly (see Sections 1 and 2), you generally won’t need to touch the ATO’s money in the first place.
If you are using ATO money, It is almost always a sign that something upstream isn’t being managed properly: forecasting, pricing, or working capital.
Two simple rules:
Put ATO money aside and don’t use it. These funds aren’t working capital. Treat them as untouchable, as they are not yours to spend.
Always lodge – even if you can’t pay. The ATO can issue two types of Director Penalty Notices (DPNs) that will allow the ATO to chase you personally:
Non-lockdown DPN (if lodgements are completed on time or within 3 months of the due date) gives 21 days to act, appointing a small business restructuring practitioner, or placing the company into administration or liquidation to avoid the personal penalty.
Lockdown DPN (if lodgements are generally later than 3 months of the due date) these can’t be avoided by putting the company into external administration.
Lodging on time keeps your options open.
See our new guide on DPNs
Tip:
Even if you can’t pay, always lodge. Don’t use ATO money and put it aside.
If you are using ATO money, something upstream is wrong – check your numbers!!!
A Final Word
When I meet directors for the first time, I often hear:
“I wish I’d spoken to you 6 months ago.”
Business failure usually isn’t about bad people making bad choices; it’s about good people who have run out of time, cash, or options and didn’t know help was available.
If you’re feeling the pressure, reach out to your accountant or us.
If you’re seeing the warning signs, don’t wait.
Reach out to Worrells.
The earlier you act, the more options you have.
