Although not widely publicised, ASIC reports annually on company failures. Their report is based on the reports received from insolvency practitioners when they investigate company failures and report the causes to ASIC.
The report for 2015-16 shows that of 9,465 reports received by ASIC on company failure the top three causes of failure (Administrators can report more than one cause for a company failure) were:
- Inadequate cash flow or high cash use – 46%
- Poor strategic management of business – 46%
- Poor financial control including lack of records – 34%
For the past 12 years of reporting the pattern has been pretty much the same.
These figures highlight both the opportunity and responsibility for accountants to help their business clients with these things.
With the advent of low cost easy to use cloud based accounting systems there surely should be no excuse for businesses having poor financial control and a lack of records. And every firm working with a business client should be ensuring each client is on top of their cash management processes and business management more broadly.
There are many opportunities for accountants to work closely with their clients through services such as business planning and strategy facilitation, budget and cash forecasting and regular review of financials to monitor performance.
Although not disclosed in the report, it would be interesting to see how many of the 9,465 business failures had a relationship with a proactive accountant. My guess is this was missing in many of these cases.
If you are interested you can see the raw data here.