Sometimes failure can be due to unfortunate and uncontrollable circumstances. More often than not, the root causes often follow familiar patterns of avoidable decisions that lead companies into financial distress.
Many of these pitfalls occur not because the director had a bad idea or lacked drive, but because they simply didn’t understand the responsibilities and risks that come with running a company.
For accountants advising clients and directors launching or growing a business, understanding these risks are essential. This article outlines the foundational knowledge every director should have before starting a business, with practical insights drawn from real-world insolvency cases.
1. Ask the Right Questions Early
As liquidators, we often see the same issues leading to business failure. These problems are often avoidable—and they usually stem from a lack of understanding at the outset. That’s why it’s crucial for accountants to have a frank conversation with new clients about their role as a director. Ask: Do they understand their legal duties? Have they run a business before? Do they know what financial and governance responsibilities come with the title?
A simple, early discussion can uncover knowledge gaps and set the foundation for better decision-making, reducing the risk of future distress—for both the business and the individual.
2. Learn to Read a Balance Sheet
A surprising number of directors don’t know how to interpret basic financial statements. The balance sheet tells you whether your business is solvent, how much debt you carry, and what assets you control.
If you don’t understand it, ask your accountant to walk you through it. A director who can read and understand their balance sheet is far better placed to make sound decisions.
3. Get a Good Accountant
A competent accountant is not a cost, it’s an investment. A good accountant will:
Keep you compliant.
Spot problems early.
Help you interpret financial reports.
Bridge your knowledge gaps so you make better business decisions.
A skilled accountant is a strategic partner, look for someone who understands your industry and your goals.
4. Bookkeeping: Do It Right or Outsource It
Accurate bookkeeping is the foundation of informed decision-making. Whether you learn to do it yourself or hire a professional, make sure it’s done properly.
Poor records lead to poor decisions—and in insolvency, we often see businesses collapse simply because directors didn’t know where they stood financially.
5. Taxes and Director Penalty Notices (DPNs)
Taxes are not optional. Ignoring them won’t make them go away. Unpaid tax liabilities are one of the most common triggers for insolvency. The ATO has the power to issue DPNs, making directors personally liable for unpaid PAYG withholding, GST, and superannuation.
Understanding the difference between non-lockdown and lockdown DPNs is critical. A non-lockdown DPN may offer options for resolution, but once a lockdown DPN is issued, those options narrow significantly, and personal liability becomes harder to avoid.
The best defence is early action. Stay compliant, lodge returns on time, even if the company may not be in a position to pay the debt. Lodging is a critical step that can protect directors from personal exposure, even in tough times.
6. Personal Guarantees: Know What You’re Signing
Many directors sign personal guarantees without fully understanding the implications, not realising they can expose their personal assets, including their family home, if the business fails.
Before signing, seek legal advice. Understand the terms, is the guarantee unlimited or capped? Is it secured? Who else is liable under the guarantee? It’s not just paperwork—it’s a potential personal liability that can follow you long after the business has closed its doors.
7. Director Loans
A common issue we see in insolvency is directors treating company funds as personal money, draining the company of its working capital. Typically, this takes the form of directors taking undocumented drawings instead of PAYG wages, which are then recorded as debit loan accounts. While these loans might be cleared at year-end through profit distributions, insolvency can disrupt this process, leaving the loan unpaid. If the business enters liquidation, the liquidator is legally required to pursue repayment from the director personally. Any money taken for personal use is considered a loan and is repayable to the company.
Always treat the company as a separate legal entity and seek advice if you're unsure whether a transaction qualifies as a loan.
8. Know When to Call It a Day
The hardest decision for many directors is knowing when to stop. But continuing to trade while insolvent can lead to personal liability and legal consequences.
If cash flow is tight, debts are mounting, payments are late to suppliers or the ATO, and you're unsure how to recover, seek advice early. Insolvency professionals can help explore options like small business restructuring, voluntary administration, or liquidation.
Final Thoughts
Running a business is rewarding but comes with serious legal and financial responsibility. With the right knowledge, professional advice, and willingness to act early, directors can avoid the traps we so often see in insolvency.
For accountants, this is your chance to guide clients toward sustainable practices.
