Is your company struggling with cashflow problems? As a director, you should know when your company is thriving, or when it may not last to the next financial year. If your company is facing insolvency, your first instinct may be to think your only option is a formal insolvency appointment. Voluntary Administration (VA) or Company Liquidation are appropriate options if your company may be insolvent and needs to formally restructure or wind down. However, for businesses meeting their debts but starting to feel a cashflow squeeze, there are other options that may seem more suitable if you believe your business can survive.
There are four alternatives to Liquidation you can look at first to help save your business:
- Negotiating payment plans or settlements with your creditors.
- Obtaining finance.
- Profit improvement strategies.
- Business restructure.
One of these alternatives may be sufficient to bring back the positive cashflow your business needs. If required, these steps can be applied together to form a comprehensive business turnaround. The best advice we can give you is to act quickly. If you adopt these strategies as soon as you run into financial problems, it should give you enough time to turn things around. If you’re unsure where to start, speak to a business debt specialist at Revive Financial and we can help you with a free business health check to assess your business’ individual needs.
Payment Plans or Settlements with Your Creditors
One of the first key ways to avoid Liquidation is to negotiate with each of your creditors directly and come up with a payment plan you can both agree on. In some circumstances, you may be able to agree a settlement to discount the total amount you pay. Informal debt negotiation is an important strategy and allows you to improve cashflow and take control of debts you are struggling to pay. It’s best to negotiate with just a few key creditors, such as the bank, major suppliers, your company’s landlord or the Australian Taxation Office (ATO).
Generally, your creditors will be satisfied as long as you’re continuing to pay them. By contacting your creditors as soon as difficulties arise and being honest with them about your financial situation, they should be willing to negotiate a payment plan. If one of your cash flow problems includes a large tax debt, you can negotiate with the ATO and agree on a payment plan. An ATO payment plan allows you to pay back what you owe in easier-to-manage instalments over an approved period.
Debt settlement is also another option. Debt settlement only works if your creditors are willing to settle for a lower amount than what you owe. If you can afford a lump sum payment, your creditors may agree to a lower amount. For example, if you owe a supplier $70,000 but you’re unable to pay it and they’re threatening legal action, you might be able to negotiate payment of $50,000 in a lump sum or a couple of payments, to settle their claim.
Many people we talk to think that more finance will solve their company’s trading woes. This often leads to throwing good money after bad. However, if you understand why your company is in trouble, have taken steps to fix it but are still struggling to pay your expenses and debts, obtaining finance may be essential to stabilise cashflow.
You can apply for a business loan for cashflow purposes. Lenders are open to these funds being used to pay tax or supplier debts and provide working capital. There are various types of finance available including secured loans, unsecured loans and debtor finance. You may also consider obtaining a mortgage against your property and contributing these to your Company. Different types of loans have very different interest rates, ranging from 4% for mortgages up to 40% for some unsecured loans. Repayment timeframes can vary as well, so it’s important to choose a loan that’s right for you.
If you think more cash would help your business, you can talk to us about the types of business finance that may suit you, including home loan solutions through our partner Positive Solutions Finance. If you do have a property with equity you can use to finance your company, you should consider smart ways to loan your company money. This includes taking security over your company at the time funds are advanced and registering the security on the Personal Property Securities Register (PPSR) within the required timeframe.
A close family member can also lend your company money. Again, it’s best they understand the risks involved if your company ends up needing to enter Liquidation at a later date.
Profit Improvement Strategies
Profit can be defined as the positive financial gain your business makes after you’ve subtracted all your expenses. For a lot of business owners, it’s what’s left over at the end of the year, which is hopefully enough to make your hard work worthwhile. The ability to generate profit is crucial to the survival of your business. As a company director, if your business is not making a profit, it can get pretty scary. First, you might stop paying yourself a wage, then you miss quarterly super or BAS payments, then the landlord or suppliers suffer.
Your first step should be to identify and measure your key profit drivers. These will vary depending on your individual business. Making your company more profitable involves looking at ways to increase your sales revenue as well as decreasing your costs. Some suggested strategies include:
- Increase productivity of your staff,
- Develop new product lines,
- Adjust pricing up or down,
- Find new customers or revenue streams,
- Look at marketing, technology and other initiatives,
- Decrease inventory, direct costs and indirect costs, and
- Benchmark key financials.
Once you identify your key profit drivers, you can then decide on, and implement, changes to improve your business’ bottom line. For example, you can identify which of your company’s products or services are most profitable and concentrate on selling more of them. If there’s a risk your company is insolvent, you should also investigate safe harbor protection to avoid personal liability for insolvent trading. The fourth option to avoid Liquidation is to implement a business restructure.
We speak to many company directors and business owners who have been forced to restructure, whether to cut costs, become more efficient, or do more with fewer employees. If your business is showing signs of financial distress, restructuring may be the only option your company has to regain financial stability and avoid a formal insolvency appointment. Restructuring is when you change internal operation processes, positioning in the marketplace, restructure debt, modify your operations and work towards becoming a more profitable and cashflow positive business. Some advantages of implementing a business restructure include:
- Decreasing operational costs,
- Improving communication and decision-making, and
- Increasing operational efficiency.
A business restructure may include selling your company’s business to an unrelated, or related, party. This involves selling some or all of your company’s business and/or assets to another entity that can trade profitably in the future. If the company that sold the business is insolvent, it will often appoint a Liquidator or Administrator. The sale must be for fair value on commercial arm’s length terms to avoid illegal phoenix activity. If not, or if you undertake such a transaction to intentionally avoid paying tax, superannuation or other debts, the sale can give rise to:
- Claims against you and/or the purchaser by the appointed Liquidator to the seller company, and
- Criminal prosecution for breaching your directors’ duties which could be investigated and prosecuted by the Australian Securities and Investments Commission (ASIC).
Save Your Business with Revive Financial
As a company director, you need to look out for warning signs of insolvency to ensure you act early to prevent your business from going under. Don’t risk trading insolvent as there are major consequences involved.
If you’re unsure which method may be best for your business moving forward, get in touch with a business debt specialist at Revive Financial today on 1800 560 558. We’ll work with you to understand your company’s individual needs and help you implement the best strategy to get your business back on track.