It’s no secret – times are tough. Costs are rising, people are spending less, and good labour is hard to come by. There’s no shame in struggling to keep your business profitable; so many others are in the same position.
What is essential however is that when you are having cashflow difficulties, that you don’t bury your head in the proverbial sand.
Continuing to trade while insolvent is a serious crime, and can result in your creditors, lenders and investors having a claim over your assets to recoup their debts. The corporate regulator can also issue penalties and prevent you from becoming a company director in the future.
Of course, you can’t always predict the future or control everything that happens to you and your business. Sometimes, despite all the skill, effort and best intentions, a business has to close down and wind up. What you can do however is clearly demonstrate that you took all reasonable steps to avoid insolvent trading.
So, what does “all reasonable steps” look like?
Here’s some tips:
CASHFLOW FORECASTS
All businesses should be doing some sort of forecasting. This doesn’t have to be fancy. There are definitely some sophisticated software out there (including some emerging AI tools), but a simple spreadsheet is a good place to start. The most important thing is the accuracy and timeliness of the forecast, not necessarily which software is being used. As a general guide, its best to forecast at least one year in advance, but there is no limit on how far forward you can look.
It is also important to forecast not just your profit and loss, but also your cashflows, which is not always the same thing. For example, purchasing capital items such as cars or shares, or alternatively taking out loans, will not appear in your profit & loss account, but they will have a big impact on cash flow!
The ATO know business forecasting shouldn’t be hard and have developed a tool specifically to assist you in assessing your business viability.
REGULAR MEETINGS
Where there is more than one director, it can be good practice to demonstrate that you met regularly (formally or informally) to discuss the financial situation of the business. It is a good idea to consult your accountant on a regular basis as well just to check your logic (hopefully you have an accountant like us – CGA Accountants – who won’t charge for every individual “quick query” you make over the phone or email). These meetings demonstrate that management is acting responsibly and being proactive within the business.
If it all goes wrong and you are being questioned by a regulator, the tax office or a bank, its good to be able to say state comments such as: “We held regular discussions with our accountant, and in addition we met every month, reviewed our latest financials and updated our forecasts, but after carefully consideration of the situation, realised the business just wasn’t going to be viable.”
This is a lot better than just saying – “well one day we just ran out of cash!”
PAYMENT PLANS
Its important to remember that solvency means you can pay the business’ debts, “as and when they fall due.”
Fortunately in many circumstances, it is possible to work on that “when they fall due” part of the equation.
Invoices/Agreements from suppliers/lenders often specify a date for repayment, but if that date is lurking and you are struggling to find money to pay, most people will be at least somewhat open to the idea of a payment plan; after all, people would prefer to be paid late rather than not at all!
You can:
- Talk to your accountant (your Tax Agent) about arranging a payment plan with the ATO if you’re struggling to pay your BAS or Income Tax debts.
- Review the terms of your bank loan. Many times, banks will be open to the idea of converting loans to “interest only” for a short period of time.
- Be honest and proactive with your suppliers; look to extend terms BEFORE you fall behind in their payments.
Providing you are sticking to the terms of your payment plans/agreements, you are still “paying your debts as and when they fall due,” even if you have missed the original payment date on the invoice.
CHASE DEBTORS
When times are tough, many businesses focus on costs and liabilities; how to reduce them or at least extend payment terms. This can be fine – but sometimes in doing so, businesses forget the other end of the cashflow process, which is to ensure your customers are paying on time.
In some cases, customers are also doing it tough themselves and genuinely need more time. However, there are often times where customers will push out payment terms if they realise you are not actively pursuing them.
SUPER IS NOT A “SOFT” CREDITOR
In days gone by, it was (sadly) a fairly common tactic when cashflow was tight to hold off on paying an employee’s superannuation for a short time. After all, the “Superannuation Payable” line on your balance sheet doesn’t tend to look as scary as “Bank Loan” or “Creditors”.
Those days are now long gone due to government changes to employers obligations.
Superannuation paid late is not tax deductible, and therefore attracts penalty interest.
Please remember:
- Super is not a “soft” creditor.
- Pay your super.
There are alternate ways to manage your cashflow.
DISTRIBUTIONS RATHER THAN WAGES
Business owners need to pay themselves; this is only fair and sensible. However, in what form does that payment take? If, as owners you are paying yourselves wages, that’s fine but don’t forget that also comes with liabilities for PAYG instalments and Superannuation (see above!).
Talk to your accountant; depending on how your business is structured, it might be more effective to pay yourself by way of a dividend or a distribution, which won’t come with the same immediate tax and super requirements. This will allow you to buy some breathing space when it comes to cashflow.
Ultimately, running a business can be a big challenge, and there is no magic solution when it comes to navigating tough times and cashflow difficulties.
But what you cannot do is pretend the challenges don’t exist.
“Doing nothing” is not an option.
If cashflow is tight and you’re worried about the future of the business, taking some of the practical steps mentioned above and doing what you can is best. At least if the business doesn’t work out, no-one can say you weren’t being responsible.
In the end when it is all over you will have learnt from any mistakes, and be ready to try again, better than ever.
If you need assistance with any of the above steps, please don’t hesitate to contact our team today for a confidential discussion about your business today.