Financial difficulties

Most corporations experience financial challenges at some point. Financial difficulties can happen for many reasons, including rising costs, reduced income, unexpected expenses, loss of funding, or poor cash flow.

Experiencing financial difficulties does not necessarily mean a corporation is insolvent. However, if problems are not addressed early, they can become more serious and affect the corporation's ability to meet its goals and obligations.

Why it is important to act early

The earlier financial problems are identified, the more options directors usually have to address them.

Directors should understand the corporation's financial position and regularly review information about:

• income and expenses
• cash flow
• budgets
• debts and liabilities
• assets and resources

Regular financial monitoring can help directors identify risks, make informed decisions and take action before problems worsen.

Financial difficulties may arise when:

• income decreases
• expenses increase
• funding is reduced or withdrawn
• customers are slow to pay money they owe
• unexpected costs arise
• business activities are not generating enough income
• financial information is not being monitored effectively

Understanding the cause of financial difficulties can help directors identify appropriate solutions.

Early warning signs

Directors should pay attention to signs that the corporation may be experiencing financial stress, including:

• falling income
• rising expenses
• frequent cash shortages
• unpaid bills
• increasing debt
• delays in producing financial reports
• difficulty meeting budget targets

One warning sign alone may not be cause for concern, but several warning signs together may indicate a more significant problem.

Directors' responsibilities

Directors are responsible for overseeing the corporation's financial management.

This includes:

• reviewing financial reports
• understanding the corporation's financial position
• monitoring performance against budgets
• considering financial risks when making decisions
• asking questions if financial information is unclear
• ensuring appropriate financial controls are in place

To help directors carry out these responsibilities, financial reporting should be a standing item on the agenda for every board meeting.

The board should regularly receive and review:

• profit and loss reports
• balance sheets
• cash flow reports
• budget variance reports that explain any significant differences between actual results and the budget.

Financial oversight should be a routine part of every board meeting – it should be consistent and proactive, not something that is only considered when problems arise. Directors should not assume that someone else is monitoring the finances or that problems will be reported if they arise.

Directors do not need to be financial experts, but they should understand enough about the corporation's finances to ask questions, challenge assumptions, and satisfy themselves that the corporation's money is being managed properly and it can meet its financial obligations.

Maintaining financial health

Good financial management can help reduce the risk of financial difficulties.

Directors can support the corporation's financial health by:

• planning and approving realistic budgets
• regularly reviewing financial reports
• monitoring cash flow
• controlling spending
• maintaining accurate financial records
• identifying and managing financial risks
• ensuring the corporation complies with its financial obligations.

Getting help

If directors are concerned about the corporation's financial position, they should seek advice as early as possible.

Advice may be available from:

• an accountant
• a bookkeeper
• an auditor
• a lawyer
• a registered insolvency practitioner.

Seeking advice early may help identify options for improving the corporation's financial position and avoiding more serious financial problems.