Small planning firms face increased insolvency risk

Small financial planning and accounting practices that do not keep abreast of their finances run a real risk of failing under current economic conditions, according to National Institute of Accountants chief executive Roger Cotton.

“My message to them currently is that they could find themselves in a very difficult financial position in the blink of an eyelid, unless they are very cognisant of their true financial position,” he told Money Management.

Planners and accountants, like all small businesses, are a “major cause of concern because they are so busy running their business that many don’t even know if they are trading insolvent”.

“They need to do their cash flow tests and balance sheet tests, and get advice from someone who can interpret financial information relative to working capital,” he said.

To emphasise the increased risks, Cotton pointed to a recent Australian Securities and Investments Commission report that revealed 1,653 companies became insolvent in November last year — the highest monthly tally since it first published the figure in 1999.

In addition, he said the Insolvency and Trustee Service revealed there were 6,649 new bankruptcies in Australia in the December 2008 quarter, which is up significantly on the same quarter in 2007.

There were also 1,991 new debt arrangements in the December 2008 quarter, up 37.1 per cent on the December 2007 quarter, which is “absolutely mammoth”, he said.