When a business is experiencing financial distress, it can be difficult for the business owner or operator to look at things objectively. Even so, it is critical to know what to do to keep their business afloat, and more importantly, when it might be necessary to take steps to avoid administration.
We asked our friends at Smith Hancock to share their insight into lead indicators and action plans businesses should be aware to keep ahead of future headwinds.
It may seem like a simple question, but it can prove challenging. At what point does it stretch past being a “difficult” month/quarter or year? There are some amber indicators of financial distress that go beyond the classic indicators of cashflow and profitability, and are more relevant to small businesses:
Struggling to find cash for each pay run, frequently overdrawn accounts, or using low doc loans are all signs that a business is experiencing financial distress and may be experiencing losses that are not being addressed.
Out of date financial data means out of date decisions. If your statutory reporting is consistently late due to accounts not being finalised, then you are flying on delay and don’t have an accurate understanding of your financial position. Things could be a lot worse than you realise!
The reality of any aged ATO debt is that the ATO is effectively funding business losses. Over the past 12 months the ATO has been far more diligent about collecting monies owed and won’t allow a business to continue owing a debt for any length of time. Recovery of debts will be a “key focus” of the ATO’s payment and debt strategies moving forward and Directors need to be aware of the actions the ATO can take, including the use of Director Penalty Notices and potentially sending a business into administration.
Have you reviewed your profit and loss? All too often when things are “busy”, and you are caught in a cycle of managing the day-to-day operations and outgoings, business owners/operators forget to take a step back and review overall position. Expenditure may have crept up with growth, or inflationary effects on inputs has not been factored into your own prices.
If your company shows signs that indicate financial distress, below are some actions you can take to address the situation:
Revisit the Company’s core values and functions; revisit your profit equation. Is the Company’s revenue sufficient to meet its costs? Sounds simple, but have you checked?
Has the business moved away from its core offering and ventured into less profitable waters? Have expenses outpaced revenue?
This reassessment might reveal the need for operational streamlining, better cost control, or even scaling back. Taking some of these steps could make a big difference to your profitability and see improvements to the bottom line.
Most creditors will want to hear from you when financial distress arises. Many will be able to offer payment deferrals on hardship grounds, however they are only willing to discuss these options in the early stages of financial distress. If the debt has been outstanding for several months with no contact it may be too late to make alternative arrangements.
In the case of the ATO, a payment plan can be negotiated, however, these are getting more difficult to obtain as the ATO increases its focus on collecting debts.
Funding is available to assist businesses in distress, however you may need to find more specialty lenders. There are lenders in the market that specialise in loans for any reasonable purpose and helping people with debt consolidation and restructuring, as long as there is security available.
It is common to use these lenders for a short period of time, say 24 months, and then refinance to more mainstream lenders once the business’ financial position has improved.
Having said this, finance can be risky and injecting capital may amplify losses if profitability is not addressed first.
The single most important step is to speak with financial advisors and insolvency experts. Experienced insolvency practitioners or financial consultants can help you to explore restructuring options that can save your business or, if necessary, guide you through an insolvency process, such as small business restructuring.
Taking these steps early in the process can help stabilise your business and put it back on track to recovery and profitability.
GSA works closely with Smith Hancock to offer clients expert advice and up-to-date insights on business insolvency and risk management solutions. It could mean the difference between improving profitability and running a sustainable business, or being placed into administration!
If your business is struggling with the signs of financial distress, reach out to our Client Management Team or Charles Galayini: CharlesG@gsaib.com.au for an obligation-free introduction to the Smith Hancock team.
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