RSM flags insolvency warning signs amid growing bankruptcy rates
The firm has outlined early signs of insolvency risk and how businesses can change course when facing cash flow issues.
Since the 2022 financial year, insolvency rates have increased year on year, driven by high operating costs and a return to stronger tax debt enforcement by the ATO, following its relatively lenient approach during the pandemic.
There were 13,089 insolvencies in the financial year to May 2025 – up 31 per cent from the same period in the year prior, ASIC data showed.
The Reserve Bank said the current insolvency highs represented a ‘catch up’ effect after a period of unusually low insolvencies during the pandemic.
“The share of companies entering insolvency has risen sharply over the past couple of years to be at the top of the range observed in the 2010s, but on a cumulative basis remain slightly below their pre-pandemic trend,” the RBA wrote in its April Financial Stability Review.
“The rise has been due to challenging economic conditions and a catch-up effect from exceptionally low insolvencies during the pandemic.”
In the context of elevated insolvencies, RSM Australia senior manager Tristana Steedman highlighted six warning signs that indicated a firm could be heading towards insolvency.
These included:
- Cash flow is always tight.
- Accounts are overdrawn and unpaid invoices are piling up.
- Banks or investors won’t lend to the business anymore.
- Business revenue is unstable and profits are minimal, without a realistic plan to fix it.
- The business is being kept afloat by debt.
- Tax debt is mounting, with no realistic way to pay it off.
Being unable to pay staff wages or superannuation payments on time was a definite sign that the business was already insolvent, Steedman added.
She urged businesses experiencing multiple of the above signs to engage with a financial adviser as soon as possible.
A financial adviser could help review a struggling firm’s pricing strategy, suggest improvements, liaise with the ATO on their behalf and restructure debts, Steedman said.
Working with a qualified adviser was also a condition for accessing safe harbour provisions, which shield business owners from insolvent trading claims.
Safe harbour provisions protect company directors from personal liability when they take reasonable steps to restructure a financially distressed company.
Steedman added that experienced advisers often had large networks, which they could tap into to identify opportunities for new funding options and explore merger and acquisition prospects.
“Reaching the point of insolvent trading carries a much greater risk to your personal finances and future prospects, and taking action to avoid that could be the best decision you make.”
