“Don’t be a frog” … how a distressed business can resemble a boiled frog.


“Don’t be a frog” … how a distressed business can resemble a boiled frog.

We are all familiar with the boiled frog scenario…  a frog will jump straight out if thrown into a pot of boiling water, but if a frog is placed in a pot of cool water that is gradually heated, it will not notice the slow, gradual change. The result? It will literally be boiled alive because it won’t know what is happening until it is too late to do anything about it.

Just like the frog, small business owners often have an inability to react to changes that happen gradually. If we ignore the warning signs of potential problems within our business, we can end up just like the frog. The business, which the owner worked so hard to build, will die a slow death that they won’t see coming until it is too late to change course. And that’s where a business advisor can help.

This is often a result of complacency by a business proprietor. So, how can you as a key influencer in a business – whether you’re an accountant, lawyer or financial advisor working with the business owner – help monitor the warning signs and make sure that business owners beat the odds and avoid falling victim to ‘boiling frog syndrome’?

Financial warning signs

No business is immune to some financial strain and stress. But with proper guidance and planning, these problems can be alleviated. A business gradually accumulating more debt while its cash flow suffers is a warning sign that the owner is heading for trouble.

A drop-in revenue, whether sudden or gradual, coupled with increasing costs, will lead to a failure to meet mandatory obligations such as employee superannuation contributions and business tax payments. Costs will inevitably be cut in a bid to break even.

Failing to collect debts owed to the business, or pay creditors, are also cause for concern. A business might be experiencing an increase in sales and profit on paper, but if they don’t actually receive the payments the business is not healthy.

To help track these potential problems, a business owner needs to have in place good administration practices and robust systems to ensure both they and their accountant are getting quality information in a timely and accurate manner.

Having quality accounting is critical. Work closely with a bookkeeper, accountant or business financial advisor who understands the business and structures the accounts in a way that can be easily understood by the owner.

At the most basic level, business owners should have a clear understanding of their cash flow position, their profit and loss and the overall state of their balance sheet to avoid financial strife.

It is also crucial for a business owner to understand the breakeven point – that is, what level of products or services you need to sell to cover fixed and variable costs – as well as the activity and return on capital employed.

Management warning signs

So often business failure is blamed on financial problems and issues beyond the business owner’s control. However, just as often it is the managing of people that leads businesses to fail.

High turnover of staff, particularly when the best people leave, is a major sign that there are problems. Of course, there will always be people leaving a business for very legitimate reasons, but if the rate of turnover begins to increase, it should be taken as a warning sign.

The same applies to absenteeism. If there is an increase in sick leave or unexplained absences of employees, then investigations should be undertaken.

For the business owner, there is also their own motivation to consider. If a previously passionate business owner gets out of bed on Monday morning and dreads going to work in their own business where they love being the boss, then what’s behind that apathy needs to be examined by the key influencers who work closely with the business owner.

What can you do before it’s too late?

The most important thing is to take action if the above-mentioned warning signs have been identified. This doesn’t mean work harder; the action needs to be taken on a strategic level. The business owner needs to step back from the day to day events so their accountant, financial advisor or other key influencers can help figure out what has changed, what has gone wrong and come up with a solid plan that actually changes the way the business owner and the company is operating.

It is at this point where it becomes beneficial to seek outside support from a specialised expert such as a business advisor who knows how to help underperforming companies. Performance improvements can include cost-cutting and other operational initiatives, combined with debt restructuring while those actions are taken.

Contact Antony Resnick on 02 9633 3333 or complete our online contact form to find out more about how we can help avoid the ‘boiled frog syndrome’.