Over the last few weeks, we have seen an unprecedented amount of business closures, while businesses that are still operating are facing tougher trading and liquidity conditions. Either sales are slowing and/or cash collections have become more difficult. Consequently, a lot of companies will endure, or will face, insolvency. So, how can the risk of insolvency be reduced? My six actions are: –
1. Be aware of your company’s financial position
The first action is to understand your financial position. Do not wait until your tax accountant does your quarterly BAS return in May. You need to know the 10 key financial performance numbers which are easy to learn and understand. You can find them in my free eBook here. Make sure you are up to date with the lodgement of your various tax returns, employee entitlements and super and GST payments. Also, it is wise to look at actuals against budget and forecast for the next six months both the profit and loss and the cashflow.
2. Improve your cashflows
Cash is the lifeblood of any business and now is the time to remain vigilant in monitoring and managing cashflows and being active at rectifying potential problems. Some areas to focus and act on are:
● Invoicing more regularly and billing promptly. Don’t wait until the end of the month.
● Focusing on collection from debtors and being proactive. A lack of communication causes many unnecessary problems, so talk to your debtors and come up with solutions that help both of you such as payment plans.
● Accepting credit cards. It is better to lose 1-3% on credit card fees than not get paid or wait a long time to get paid.
● Looking at stock levels. If you can convert stock into cash by moving it do so, even if it is at cost.
● Avoiding over-trading. Do not take on a large order if you do not have the resources to fulfil it. Those resources might be stock, or people, and both these will require cash resources before the customer or client makes payment for the sale.
● Selling assets. Just this week, I walked around a client’s car park and identified three utes and a truck that I got them to sell.
3. Check overhead expenses
This is often looked at when times get tough, but I see two main issues arise. First, business owners wait until way after the sales fall e.g., they see their sales in April fall but wait until June when the cash inflow because of the lower April sales falls before they look at overheads. Second, they do not take severe enough action. Act hard and fast on cutting overheads and then when conditions improve growth overhead expenses slowly and incrementally.
4.Investigate financing options and talk to your bank
Look at debtor financing or factoring to get the cash in the door quicker than waiting for the customer to pay. Talk to your bank now, and with a plan and vision about what support you need, why you need it, and when you expect reverting to normal trading/financing conditions. Make sure you talk to your banker in person (or by video-conference) and not just by email. People like to know the people they are dealing with and this needs to be by being visible.
5.Communicate with creditors
The worst thing you can do is ignore creditors. These are people and businesses that have invested in your business by providing you credit. Be open and honest as possible. Talk to them and they will be more likely to help you out. Also, the creditors at the bottom of the list of who gets paid in an insolvency event are probably the ones more likely to cooperate in renegotiating payment terms. Last, do what you say you will do. If you say to a creditor, you will pay them something on Friday, then pay them something on Friday.
6. Seek help
Australian Small Business and Family Enterprise Ombudsman Kate Carnell announced an inquiry to examine the insolvency industry last year. According to a discussion paper issued by Ms Carnell in December 2019, the clear message was that small businesses experiencing financial difficulties frequently “ignore the signs of financial distress, hoping or believing that things will improve, until it is too late.” Therefore, remedies that could have been implemented to turnaround the business had the owner promptly sought professional help often elapse because of delayed response. The ombudsman said that “it’s crucial that small and family businesses experiencing financial difficulties understand they don’t have to go it alone. Rather than toughing it out, lean on a trusted advisor. The sooner small and family businesses get help, the more likely it is they can achieve a turnaround or restructure.”
There are also provisions in the Corporations Act known as Safe Harbour, which allow directors protection from insolvent trading penalties if they implement a plan that has a reasonable expectation of achieving a better outcome than putting the company into administration. To avail themselves of these provisions, the directors need to engage a qualified restructuring advisor.