Too Often, Cash Flow Problems End in Insolvency


Too Often, Cash Flow Problems End in Insolvency

Unfortunately, insolvency is often the outcome of cash flow problems for Small Business.

Once a Small Business gets into a cash flow crisis, the “system” often takes over, and any hope of recovery is lost. The end is inevitable and usually results in the owner losing control of the business, as well as personal assets.

Now, at last, the practices surrounding the insolvency industry and how it treats small business are being put under the microscope. Again, the Australian Small Business and Family Enterprise Ombudsman, Kate Carnell, has stepped up to the mark. The Insolvency Practices Inquiry was launched in October, and business owners have until December 20th to submit.

The impetus for this inquiry was provided by:

  • a previous inquiry by the Australian Small Business and Family Enterprise Ombudsman business. It looked into “the adequacy of the law and practices governing financial lending to small businesses.”
  •  tales from the Banking Royal Commission, where insolvency practices weren’t expressly addressed, but tales of devastation were plenty.
  • Seventeen inquiries and reviews, with 40 recommendations, into the relationship between banks and small business since the GFC.

Surprise, surprise – all these previous inquiries found a huge difference in power. A difference between a small business and the large organisation it was engaging with.

Power differences and conflicts of interest

Consequently, the small business is usually on the “take” end of a “take it or leave it” relationship. Complex, unfair contracts, lack of information, conflicts of interest, and several other conditions that are conducive to small business failure are the result.

“Often, the investigating accountants become the liquidators, so it’s in their interests to recommend liquidation because they get another gig.”

Kate Carnell, Small Business Ombudsman

Little wonder then, that financial relationships between banks and small business end up with liquidators involved. At this stage, the small business owner realises just how their access to justice exactly mirrors their power in the original contract. And it’s very small.

Once the process starts with a bank or creditor taking action, there is virtually no chance for a small business to restructure and recover.

The Inquiry will look at:

“the existing insolvency system through the experience of small business the degree of transparency of the governance, processes and costs of practitioners including legal advisers, valuers, investigating accountants, administrators, receivers and liquidators how the insolvency of a small or family business may lead to bankruptcy for the owners how the framework impacts the practices and fees of insolvency practitioners.”

Make this your last big job before Christmas

Again, it is vitally important that Small Business owners who have (or know someone who has) experienced the insolvency process speak up. Despite those 40 recommendations from 17 inquiries that I mentioned earlier, very little has changed.

You have until December 20th to make your voice heard. It’s very easy – simply follow this link and complete the survey.

If enough Small Business owners speak up, our Christmas present next year just may be some better rules.

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