The client operated an established demolition and excavation business serving both commercial and private customers. Having maintained a long-standing relationship with one of Australia's four major banks, the business had experienced significant changes in its operations over recent years.

An increasing dependence on commercial contracts, particularly projects involving the Education and Health Departments, had created cash flow challenges. Delays in government approval and decision-making processes affected payment schedules, leading the business to seek several short-term funding arrangements from its bank. When these facilities could not be repaid as expected, the bank requested updated financial statements and cash flow forecasts.

The Director's wife, who managed the bookkeeping, prepared budgets according to the bank's requirements. However, when the business failed to meet its projected figures several months later, the bank transferred the account to its distressed business division and appointed an Independent Accountant (IA) to assess the company's financial position.

The Director approached our business consulting team in Melbourne for assistance in preparing the extensive financial documentation requested by the IA. Based on the proposed review fees and circumstances, we recognised that the bank might already be considering formal intervention and the potential closure of the business.

Action

We negotiated additional time with the IA to ensure the financial information could be accurately reviewed, organised and presented. Over a three-week period, we undertook the following actions:

• Reorganised the Chart of Accounts to produce meaningful management reports for the current financial year and support more accurate financial analysis.
• Reviewed the depreciation treatment of 53 chattel mortgages, identified inappropriate accounting methods and corrected historical and year-to-date expenses and liabilities.
• Assessed existing contracts to distinguish profitable projects from those negatively affecting business performance.
• Examined five years of expenditure and identified substantial capital purchases that had incorrectly been recorded as operating expenses, reducing reported profitability.
• Identified unsuitable financing arrangements that were placing unnecessary pressure on business cash flow.
• Determined that cash-basis Business Activity Statement (BAS) reporting was contributing to the company's cash flow difficulties.
• Collaborated with the Director and bookkeeper to prepare a 12-month financial budget incorporating a revised commercial and private project mix, improved financing arrangements, restructured ATO debt repayments and a proposed transition from cash to accrual BAS reporting.
• Reviewed the bank's existing lending facilities, all of which were secured against property.

Our submission to the IA also proposed an additional $50,000 in working capital and the conversion of the permanent portion of the overdraft into an interest-only term loan to reduce monthly financing costs. We further recommended refinancing three major pieces of machinery through external lenders, allowing more suitable repayment terms and residual values to be established. These changes were projected to improve monthly cash flow by approximately $20,000.

Outcome

The Independent Accountant supported the proposed financial restructuring measures, and the bank subsequently approved the recommended changes on the condition that we continued providing monthly management accounts and financial reporting.

Within three months, the client's financial position had improved sufficiently for the bank to transfer the business out of its distressed business division and return the account to its regular Relationship Business Banker.