At times, things happen that is completely beyond your control and worse, it leave your business in a very difficult financial situation.

According to the Australian Bureau of Statistics, of the 294,210 new businesses in 2010-2011 fiscal years; only half are still operating in June 2014. That’s an average of 49,035 closures per year during the three-year period or 134 closures per day.

134 businesses from this group hit the wall each day, while thousands of others struggle just to stay operating.

One of the biggest reasons for business closure is financial issues including insolvency (finance is one of the top three reasons). Surprisingly, financial troubles inside an organisation can be traced back to the core values and practices that the organisation upholds.

Breaking Down ‘Insolvency’

According to Investopedia, insolvency is a state of financial distress in which someone is unable to pay their bills. It can lead to insolvency proceedings, in which legal action will be taken against the insolvent entity, and assets may be liquidated to pay off outstanding debts. There are numerous factors that can contribute to a person or company’s insolvency.

Insolvency vs. Bankruptcy

Bankruptcy is different from insolvency. Insolvency is a type of financial distress, meaning the financial state in which a person or entity is no longer able to pay the bills or other obligations. The Internal Revenue Service (IRS) states that a person is insolvent when the total liabilities exceed the total assets. But a bankruptcy is an actual court order that shows just how an insolvent person or business will pay off his creditors, or how he will sell his assets in order to make the payments.

So a person or corporation can be insolvent without being bankrupt, even if it’s only a temporary situation. If that does extend longer than anticipated, it can, however, lead to bankruptcy.

In an article entitled, “We Are Insolvent… Are You Sure?” Hitesh Mohanlal stated the truth that many companies don’t want to face—the importance of financial record keeping and monthly reporting, and then reviewing these monthly.

“You really want to look at the figures when things are bad. If the company goes into liquidation providing this to the liquidator can show you tried your best and you made decisions based on actual facts or best estimates. The worst answer you can give a liquidator is that you had a gut feel or just felt things would improve,” Mohanlal stressed.

From a business owner’s perspective, I definitely agree. Without keeping track of your finances and without understanding your company’s situation; it will be difficult to create sound and informed decisions. If your decisions as a business owner are based purely on “gut feeling”, then you are in trouble.

One of the basic but very important practices to promote financial security in the company is updated bookkeeping and reporting. Every business owner, partner or shareholder should have a clear idea of the figures and the dynamics of the company cash flow.

Of course, it is understandable that not all businesses have in-house accounting talents who will keep track of the finances. Also, not all owners are familiar with making business reports. The solution is simple; outsource this to bookkeepers and management accountants before it is too late.

One of the reasons Greymouse started the bookkeeping and reporting services, was to satisfy the demand to help small business owners survive.  The focus for the first three years must be in survival and cash flow management.

If you are in need of bookkeeping services, Greymouse has a team of accounting professionals who can do the task for you. Our accounting talents are trained and skilled in recording financial transactions and helping you understand the figures by converting these into graphs. Graphical images make it easy for my brain to understand the business direction up or down.  Graphs make business management so easy that I can manage 9 businesses in 4 countries using graphs.

There is no denying that one key to business survival is the transparent recording of your finances. Being transparent still remains the best way to confront financial problems early, before they become terminal.

Just like what the old saying goes, “Prevention is better than cure.”