Signs You Are Running a Zombie Business

The last two years have certainly put pressure on small businesses. The various lockdowns and more recently the seven-day isolation rule (good news that this has lifted in NSW) have made running your business far from normal. Government handouts have been now a thing of the past and if your business was relying on them, this may have created a false sense of security which is now showing signs that your business may not be sustainable. The worst thing you can do as a business owner is to fail to identify the signs.

Is your business a Zombie business?

A zombie company is a business that barely scrapes by and is always short of cash. In accounting terms, it covers most of its running costs but is never able to develop a profit margin.

A zombie company is a business that is always just getting by. They are always just that one downturn away from trading insolvency. From an Accounting perspective, A zombie business will always make enough to cover its running cost but never develop a strong profit margin. The problem with running a business like this is that you are always right on the edge of trading insolvently which creates risk for the Directors. Whilst a company is a great structure when it comes to protecting personal assets, if your business is trading insolvently, this may make personal assets available to creditors.

Signs your business might be a zombie business

There are some indicators that during the normal day to day running of your business may just appear frustrating or annoying but are more likely a symptom of a bigger problem. Most of the time if these signs are addressed, you can put a plan in place and avoid a longer term or terminal outcome:

· Successive years of losses

· Upset creditors

· Late debtor payments

· High staff turnover

· Inability to obtain finance

· Never positive cashflow

· Non-Payment or late payment of super obligations

· Non-Payment of Business Activity Statements.

Mistakes to avoid

There are some industries in Australia that are more prone to trading this way. These include Building and Construction, Retail and Hospitality, and industries where there is high labour cost such as professional services but there are also mistakes that business owners make that send them down the Zombie company path:

Managing Tax and Super

Whether it is GST, PAYG or quarterly super payments, they are often not prioritised by a new business owner when things get tough. Even early on, for many business owners, tax and super are an afterthought and something to pay later. Unfortunately, it is these payments, when remaining unpaid, that will ultimately bring your business undone. If you are not able to pay these commitments, it is vital from an asset protection point of view that you continue to lodge BAS and superannuation Guarantee Charge forms on time - and speak with your accountant.

Working in the business rather than on it

Many business owners have usually gone out on their own after working in employment for many years and built a business around their expertise such as Builder, Lawyer, Landscaper, (even Accountant). So, it is inevitable that they only focus on that skill and forget that they are responsible for all roles in the business. This will be ok until the inbound enquiries have all dried up because they haven’t done any marketing, or their materials stopped being delivered because the bookkeeping isn’t up to date. It is important that you work on your business right from the start.

Expensive sources of finance

So, you have had this great business idea and need to launch fast to take advantage of an opportunity so you grab the start up money from wherever you can get it. Most start up businesses have few options for finance so rates will usually be higher. Many business owners do this and years down the track the facility has not been reviewed and continues to eat into profits, making the business difficult to grow. It is essential that you review the cost of your finance regularly and it is factored into your pricing and cashflow projections.

Not seeking the right help

Business owners can shy away from help for several reasons including cost, not having the time to spare, often they are embarrassed that their business is not doing well, or they don’t think anyone knows more than them. Successful business owners not only find the time to seek guidance, but they also know that there are always people that can give them advice on how to do things better. They also see the value of investing in that advice. Sometimes seeking help early on can save a business from needing to close.

Poor HR Practices

This is an area that often creeps up on business owners. They start out on their own and gradually add employees and whilst you have a small team, they never consider HR to be important. For many business owners, they think HR is just about payroll and managing sick days and annual leave, but it is much more complex than that and poor HR practices in your business can bring it unstuck very quickly. It is important that you acknowledge HR as an important skill of all business owners and either get some training or seek to partner with a HR specialist.

Keep up with technology and practices

There is one guarantee in business – if you don’t keep up with current practices and technology, you won’t be around for long. Keeping up doesn’t necessarily mean being a pioneer or spending thousands, it means consistently reviewing your technology, how you do things, and keeping up with relevant legislation. Finding ways to do things faster will help you in a competitive market and avoid a potential cashflow crisis or keeping up to date with modern awards and flexible work arrangements may help you cut costs or keep your team engaged.

If you need assistance identifying when your business might be in trouble or need help getting out of trouble, don’t sit on your hand. Fox Group Chartered Accountants have many years working with business across many different industries and know how to help business owners not just when things are going great, but always when they need their accountant the most – when things aren’t going so great. If you are not getting this from your accountant, reach out for a chat today.