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Key Indicators of Business Success and Warning Signs Part 1

The Corporations Act 2001 sets out the laws for corporations, financial products and services in Australia. As in Section 95A the Corporations Act 2001 defines insolvency as follows:

  1.  A person is solvent, if and only if, the person is unable to pay all the person’s debts, as and when they become due and payable.
  2. A person who is not solvent is insolvent.

Despite this simple definition, declaring a business insolvent simply based on a cash flow problem can be troublesome since this dilemma might only arise short-term and not represent an inevitable insolvency. There are certain key indicators to measure a business financial strength, operating performance and liquidity to reduce the need for future debt collection.

 

Current Ratio

The current Ratio is often used by investors to measure business liquidity by comparing its short-term assets (cash, inventory, receivables) to short-term liabilities (debt and payables). Since short-term liabilities are due within the next year, it means that the business has a limited amount of time to pay for those. The formula for calculating a business Current Ratio is dividing its current assets by current liabilities. In general, a ratio of 2 to 1 represents a low-risk potential for the creditor, whereas a ratio below 1 would indicate that the business might not be able to pay its obligations when due short-term.

 

Receivable Turnover

The Receivable Turnover ratio is another measurement that helps to evaluate how efficient a business uses its assets by turning its accounts receivables into cash during an accounting period. To calculate Receivable Turnover, divide the annual net credit sales by the average accounts receivable. For example, if a business had $80,000 of average receivables during the year and collected $160,000 of receivables during the same year, the business would have turned its accounts receivable twice because it collected twice the amount of average receivables. If Receivable Turnover is tracked on a trend line and slowing down, this might indicate an increase in funding for the collection staff and worth looking into the reason why turnover is declining.

 

Gross Margin

A company’s Gross Margin reflects its total sales revenue less its cost of goods sold. It is frequently expressed as a percentage and calculated with the simple formula net sales minus cost of goods sold, divided by net sales. The percentage allows a comparison between businesses with different sales levels, the higher the percentage the more efficient the business.

If these formulas are early applied and the key indicators understood by the business directors, instant action can be taken to avoid terminal insolvency.

If you would like to learn more about the debt collection services we offer, contact us now. We have over 30 years of experience providing professional and discreet debt collection solutions for clients of all sizes and across all industries. With debt collection agencies in Sydney, Melbourne and Brisbane we have the east coast covered.

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KEY INDICATORS OF BUSINESS SUCCESS AND WARNING SIGNS PART 2

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  • I have known the principal of the BOSTON Group (Derryn HARRISON) as well as key staff members (including Ben GOWER) for well over 2 decades and have been using their professional services for myself as well as for Powerhouse Logistics Pty. Ltd. on a regular basis, not only in Sydney but on a national basis.

    At all times BOSTON have been extremely pro-active, attentive, courteous and professional with all matters we threw at them. Their advice has always been extremely sound and commercial and I find them to be a "breath of fresh air" within the legal fraternity and have no hesitation whatsoever to highly recommend them.

    Peter Brueckner

    Powerhouse Logistics Pty Ltd (CEO)

  • Expect A Star has worked with The Boston Group for 10 years. In this time we have appreciated the ongoing support of Boston for all of our collection and legal requirements. Like most businesses cashflow is critical to ongoing success and growth, with Boston we have found a partner who are an extension of our business and play a key part in our cashflow management. The Boston Group bring a level of expertise to our business which is valuable and coupled with their excellent customer service we look forward to continuing to work with them for many years to come.

    Ryan Meldrum

    Former CEO

  • I have been using the services of The Boston Group and their legal entity for over 11 years. During this time I have found their service to be impeccable, delivered with the utmost professionalism and integrity. The vast majority of cases that I have placed with Boston were far from straightforward, requiring legal acumen and delicate handling. Having used all methods available without success to procure payment, I confidently placed these matters into their safe hands. In all instances a successful outcome was achieved.

    Mark Parish

    Credit Manager

  • SNP Security has had the pleasure of working with Boston Commercial Services for the past 11 years. Boston has played an integral part in the continuing success of SNP Security’s low DSO’s, 90 Day % Debt & of course Bad Debts Written Off.

    Amanda Griffiths

    National Administration Manager

Boston Commercial Services prides itself in offering specialised, professional services, through a highly experienced team of debt collector, with personalised client attention.