Posts Tagged ‘Reidy’

  • When the money runs out – Print21 Magazine Feature

    Printing industry news in recent years has been filled with stories of companies going bust. But just how many businesses have gone under and how do you know if you are about to become one of the statistics? Alison Stieven-Taylor looks at the business of going broke.

    With printing businesses continuing to fall into financial trouble every week, the fiscal state of the industry is a hot topic. And while business owners scratch their heads trying to find reasons as to why they’ve landed themselves in the financial mire, statistics suggest that they need look no further than their own reflection to discover why their business is failing.

    According to the Australian Securities and Investment Commission (ASIC), inexperience in managing a business, lack of strategic capacity and inability to manage cash flow are the three key factors that beleaguer the small business operator in Australia, regardless of industry. In 2010, 43 per cent of administrators cited lack of strategic direction as the reason for business failure, followed closely by poor financial management at 33 per cent. The state of the economy rated 26 per cent, a statistic that has more than doubled since 2004 as a result of the GFC.

    Of Australia’s 2.1 million-plus businesses, 96 per cent are categorised as small businesses and, according to the Australian Bureau of Statistics (ABS), around 50 per cent of these will fail within four years. While this debunks the myth that the majority of small businesses go to the wall in their first year, the statistic itself is only representative of those businesses that fail and close, and doesn’t factor in the many that just limp along and barely make ends meet.

    In 2010/11, the number of new businesses in Australia grew by only 0.4 per cent across all segments. In the manufacturing sector, where print sits, the number of companies exiting the market was slightly higher at 11.6 per cent compared those entering (10.1 per cent), representing a decline in the number of businesses for the fifth consecutive year. As far as states go, while NSW and Victoria reported small gains in the number of businesses entering versus exiting, Queensland, South Australia and Tasmania all recorded falls.

    Greg Evans, director of economic and industry policy for the Australian Chamber of Commerce and Industry (ACCI), says of the small business statistics released in the ACCI’s August report, “When you look at the small business sector it’s really in a hibernation or even survival mode at the moment… Small business isn’t borrowing, small business isn’t investing and small business isn’t employing.”

    Industries hardest hit by business closures have been building and construction, services, retail, accommodation and food, and the manufacturing segments. Specific statistics on closures in the printing industry are not easily secured, or defined, but according to Printing Industries, in 2007/8 the ABS reported there were 6,922 printing businesses operational in Australia. In 2010/11, this figure was 6,248, a fall of 674. In 2007/8, 908 companies exited the industry and, in 2010/11, there were 722 departures. The reasons for exiting are not just financial. Some business owners retire and close shop, but the vast majority exit because of trading issues.

    Low barriers a handicap

    According to Geoffrey Reidy, director of Rodgers Reidy , chartered accountants, the problem with industries like printing is that there is no requirement to have any business management experience to set up a printing shop, so the barrier to entry is very low. As a result, there are many companies that are being run by inexperienced operators who get themselves into financial trouble simply because they don’t have the business wherewithal to avoid the pitfalls.

    “I often see people who are very good in sales and think they can run their own business as a consequence,” says Reidy. “Sales are, of course, very important, but there are a lot of other issues a business manager needs to be on top of.

    “Also with printing, unless you keep up-to-date with the latest technology and market position, you can quite easily get left behind.”

    And being left behind can mean curtains, even for those who have been around for decades.

    “We had one company that had been in business for nearly 100 years, but without investing in new equipment and technology they went under,” adds Reidy.

    Reidy says the business management profile of the printing industry is not that dissimilar to that of the building and construction industry where, in NSW, the number of failures in that sector has become so great, the state government recently launched an inquiry. Each time one business falls over it has the potential to take a number of others with it and, in this sector, the devastation has been widespread amongst the small, unsecured contractors that populate the industry.

    According to Reidy, poor management can manifest itself in many different ways, from being extravagant when there is money in the kitty, to not knowing where the business is heading or keeping poor financial records.

    “A good manager doesn’t run on optimism. A good manager has control of the mainstream business and plans for future, while a poor manager drifts along in the ebb and flow and has no real idea of where the business is at.”

    Reidy says he has seen it all, from the profit and loss sheets that bear no resemblance to the true financial position of a company, to those companies that have traded on the premise of hoping for the best, only to be sorely disappointed that the good luck fairy didn’t sprinkle her magic dust on them.

    Tax debt spells trouble

    The terms insolvent, liquidation, administration and receivership all relate to businesses, says Reidy, while bankruptcy is an individual status. So what do these labels mean?

    In laypersons terms, a liquidator, administrator or receiver are all insolvency practitioners. The liquidator looks after debt on behalf of all the creditors. The receiver only looks after the secured creditors debt, such as the banks, and is charged with getting the best return for those creditors only. The administrator is concerned with the interests of all of the creditors. Most large companies go into administration to allow time to look at operations to see if there is a way the company can be sold or saved from liquidation, which means closing the doors.

    Moving from solvent to insolvent can happen in a matter of months and often starts with a company being unable to pay its tax bill. “There are lots of companies out there that might have huge tax debts, as an example, and they are insolvent, but trading on blind faith, optimism or stupidity that they will come out of it,” says Reidy.

    Of course trading whilst insolvent is an offence under the Corporations Act but Reidy confirms there are plenty of companies doing just that.

    “If these companies end up in liquidation, and the liquidator forms a view that the company was continuing to incur debts at a time when it was insolvent, then the liquidator can pursue the company’s directors via the court for debts the company incurred after the date it became insolvent,” he says.

    The first thing Reidy looks at when he’s doing insolvency work is tax and then superannuation instalments, both payments that companies often stop paying when they start to feel the pinch. Reidy says the tax bill is frequently the last to get paid, as the Australian Tax Office (ATO) is no longer viewed as a secured creditor.

    While most of us might secretly smirk at the thought of the ATO missing out, being unable to meet your tax bill should set off alarm bells, loudly. If you let your tax bill run out to three months behind, says Reidy, “You are most definitely trading whilst insolvent.”

    Signs of distress

    There are other signs too that things may be on the downward slide. Creditors should be current, but if the majority is drifting to 60 or 90 days that alarm bell should also be ringing. And if suppliers are stopping credit, says Reidy, this is a huge sign that something is amiss. He tells of one company that ended up being liquidated but not before the company had moved from one supplier to another as its credit was refused. “The director was on his third supplier by the time the company was wound up. He knew he was in trouble, but he continued to incur more debt.”

    Another factor that impacts the industry as a whole is the practice of quoting below cost to get work in the door in order to manage fixed costs. This is a road to nowhere, says Reidy, but is prevalent in industries where competition is fierce and margins low. And is detrimental to all, not just the company involved.

    The world of insolvency is full of stories that really defy understanding. In researching this article I’ve been told about company directors who take a second mortgage on their own homes or, even worse, on that of their ageing parents in order to prop up a business that has no hope of surviving. In the end they lose their shirts and everyone else’s at the same time. And what of the employees who have made salary sacrifices in order to help an ailing business, only to be short-changed as entitlements are lost in the wind-up? Or the directors who keep showing up on company boards despite their history of poor fiscal management? Or those who dip into their superannuation, often putting themselves in a precarious financial position at a stage of their lives when they can least afford it?

    The answer seems obvious. Don’t wait until you can’t pay your bills. Seek help to determine if you can steer a course to better days. And if not, then close up your shop before you have a pack of angry creditors after your hide.