by Paul Gidley11.11.15

As widely reported, the number of companies feeling the heat from the ATO’s new vigour in its debt recovery philosophy is unprecedented. In the past six months garnishees are being used with gay abandon, legal action and wind up applications have sky rocketed whilst repayment arrangements with the ATO anecdotal appear to be a little more difficult to come by than they were post GFC.

But what does this mean for corporate Australia, particularly the micro, small and medium enterprise (MSME) which accounts for more than 90% of Newcastle/Hunter business? What will be the side effects for the MSME market place?

The Tax Man’s heightened collection activity may result in more money for the government, but will not solve the issue of problematic debtors in the market place, those businesses under performing, facing solvency issues and using the ATO and trade credit as a means of financing losses.

You don’t need to be a graduate from the school of the obvious to conclude that those businesses not paying taxes due to financial problems and under pressure from the Tax Man will look to alternate sources of free finance and most likely manifest in your business in the form of ageing trade credit.

If the ATO’s policies result in a small shift of the $30 billion or so dollars owed to them by the private sector it will result in cash flow problems for MSME sector. It is therefore imperative in this emerging climate that businesses employ a high level of diligence in relation to debtor and credit policy.

A robust and effective business to business debtor/credit policy will maintain, enhance and protect cash flow. As we are all well aware, cash flow is the most important fundamental driver of any business. So what can we do? The following measures may help you avoid becoming an interest free financier for one of your customers/clients:

  1. Do you have a formal debtor/credit policy? If not get one. Your industry body may be able to provide a pro-forma policy, or a friendly competitor, if not any reputable commercial legal firm will be able to draft suitable policies for your industry.
  2. If  you do have a formal debtor/credit policy review it ASAP. Times have changed. Ensure your credit application and terms of trade are up to date with current legislation for example the Personal Property & Securities Act 2009 as well as industry best practice. Consider inclusions such as personal guarantees and registrable interests in real estate.
  3. Ensure your customers are well informed of your Debtor/Credit policies and practices you employ promoting these policies. This ensures no surprises if credit is refused, terms of supply change or collection activities are undertaken. Review aged receivables listing and respond to any aged debts.
  4. Review your aged receivables weekly. This is the primary source of cash flow for your business unless sales are primarily cash. Remember a sale is not really a sale until the cash hits the bank.  Identify ageing debtors and monitor them closely. Employ your debt collection policy as early as possible. Those who move first usually get paid first, the last to move often end up speaking with the Liquidator.
  5. Review your customer base to identify any industry groups or sectors that may be under economic duress or customers who are consistent late payers. Stay abreast of local and regional economic conditions as well as national and global conditions.
  6. Make sure you employ your debtor /credit policy consistently. Be systematic and timely in its implementation. A good debtors’ clerk is worth their weight in gold. The right person will ensure you get paid before others without angst and argument, whilst still retaining commercial relationships with genuine customers.
  7. Form a relationship with a reputable mercantile agent and legal advisor specialising in debt recovery.
  8. Finally, there’s an old adage about enemies which when related to debtor/credit policy reads  “Keep your timely paying customers close, but your slow paying customers even closer”.

Some businesses can be hesitant to formally pursue aged receivables early in the collection curve for fear that they may upset and lose that customer. Remember your customers are businesses too and understand the need for effective debt collection policies and will often respect professional, organised and systematic approaches when people are trying to recovery money from them. Let’s face it, we all know how rigorously the pointy end of town employ their debtor/credit policy, much to MSME envy.

So remember, cash flow is the life blood of any business operation, a sale is not a sale until its paid for, although your accountant may argue the opposite, and keep your enemies, i.e. slow paying customer closest and hopefully what was once the Tax Man’s problem, will not become yours.

Shaw Gidley are experts in restructuring, turnaround and insolvency and provide free initial advice on these matters. Please contact our offices on (02) 4908 4444 or (02) 6580 0400.