Be aware of the “boiled frog syndrome” in business!


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Be aware of the “boiled frog syndrome” in business!

Welcome to part two of our podcast series with Joanna Oakey, Lawyer at Aspect Legal and Antony de Vries, Partner at dVT Group. In this podcast we dig deeper into the underlying concepts and warning signals that business owners and their accountants and other professional advisers should be looking out for.

The main points covered in the podcast include:  
a)  Importance of financial information;
b)  Good growth vs Bad Growth;
c)  The concept of having enough;
d)  The danger of over exposure;
e)  The boiled frog syndrome;  and
f)   Talking to your accountant. 

Financial Information – Cash Flow:
Poor cash flow is always one of the biggest issues when running a business.  It is difficult to know what your cash position is if your financial records are disorganized, incomplete or you don’t understand how to read them.

The podcast (see link below) features an example of a white goods retailer that, whilst was generating extra sales as a result of an advertising campaign, was actually creating a false economy as the selling price turned out to be less than the cost price.  This was due to the actual true cost being clouded by complex ways of dealing with rebates and stretch targets from suppliers.  In fact, the more he sold the more he lost.

To avoid getting to this point, it is critical to have and understand the proper financial information to identify issues and allow corrective action to be taken early.

Good growth vs Bad growth:
Directors or shareholders often start to tip money into a business as they have this underlying belief that the business is growing and that anything that is growing is good without obtaining the right financial advice to really understand if it is good growth or bad growth!

When a business is growing, it often experiences similar signs of cash flow pressure as a business that is actually struggling or shrinking. Obtaining more funds can help, but it also masks the problem.  You need to differentiate between the symptoms and the causes.  An example is also featured in the podcast. 

The concept of having enough:
In business, we all understand the simple concept of making sure you can sell your product or your service for enough to cover the costs, plus the actual costs of the infrastructure that you need to be able to put you in the environment whereby you can provide that service or product.

Whilst it is a simple concept, it is not always clear in reality.  You need to continually look for the signs that may indicate that this is not happening, such as exceeding overdraft limits, bouncing of cheques, defaulting on loans or interest payments etc.  

Asking for help and obtaining assessments of where your business is can help identify where leakages are so they can be rectified early before it’s too late.  And with prudence, hard work and a little luck you can actually avoid disasters.

The concept of overexposure (or too much concentration on one customer):
Another sign is when clients have over exposure to a large amount of money that they are owed from one particular client.  In this case, it is important for business owners to understand the risks associated if that particular client was to be wound up and they end up with only 5 or 10 cents in the dollar for the money that’s outstanding to them.  It is imperative to look out for possible insolvency signs or signals from these clients. 

Other warning signs are when payments being made to clients end in round figures, indicating that invoices are not being paid in full.   If this is your one and only customer, you must take the necessary precautions and action, otherwise it may affect you like a virus and you are going to suffer.  

The boiled frog syndrome:
The time to get help is a line that is not always clear as there are a lot of elements of ‘you don’t know what you don’t know until you realize you don’t know it!”.  

It’s like the boiled frog syndrome?  If you put a frog into a pot of boiling water, that frog would jump straight out.  But if you actually put the frog in a pot of cold water and then slowly turned up the heat, it happens so gradually that the frog does not realise its environment is becoming toxic and ends up being boiled to death.

Hence, the accountant plays an important role of talking to their clients to help identify when it’s time to hop out of the water and suggest when it’s time to get external help from someone like the dVT Group.  Coming in together to go over the situation and using our expertise in this area, we can assist by quickly summarising the situation and what options and alternatives are available.  Remember… “when something’s broken, it doesn’t get better by itself”.  

First, talk to your accountant:
Accountants are in a great position to have these conversations.  They can sometimes be difficult conversations to have as no one likes to talk about failure or be challenged with severe consequences.  The aim is to assist directors to reduce the noise and to avoid it becoming a massive distraction to running their business.

However, accountants have many clients to service and may not necessarily have the time needed to fully analyse and identify the best course of action with the urgency that is sometimes required.  They should direct them to someone like dVT Group to help them recover and get back in control. 

We have close relationships with accountants and work with them to help the business owners.  We do not poach clients but in fact they are made more robust which helps not only the client but also the accountant.

Our success has come from our commitment to getting the right outcomes.  When somebody comes to us our approach is to start with the real issue, identify the alternatives, and work out a practical solution.  We don’t point the finger or criticise!

If you would like more information, please call Antony de Vries (or any one of our 5 partners) at dVT Group on 02 9633 3333 or if you would like legal advice, please call Joanna Oakey at Aspect Legal on 02 8006 0830 or visit our websites dvtgroup.com.au or talkinglaw.com.au. 

In the meantime, we hope you take the time to enjoy this podcast (27 mins) and that you obtain some useful tips of how to recognise trouble brewing in business before it’s too late.  Please click on the link below. 

[EP 036] Recognising Signs of Insolvency Risks Part 2: Top things many business owners and accountants miss