by Paul Gidley24.07.17

Revelations that Melbourne Cup day could herald the first in a new cycle of interest rises, plus heightened collection efforts by the Australian Tax Office (ATO), should remind companies trading with varying degrees of insolvency, not to wait until their debt becomes unserviceable to start seeking help.

Last year’s decision to start chasing debt as low as $60,000 – previously $300,000 – means the days of companies using the ATO as substitute bank, offering free-credit (until caught) are long gone. The implications for ‘at-risk’ companies, big and small, that use the ATO to kick their debt problem further down the road are enormous.

It’s becoming increasingly unrealistic to expect your business to remain artificially propped up by historically low interest rates, and an ATO that’s benign on tax recovery.

But the good news is that cash-strapped companies that bother to address insolvency risk early enough, don’t have to remain smoldering liquidation ‘time-bombs’. By improving their liquidity, companies will be in much better shape to weather a rising interest rate environment, and potentially reach some kind of agreement with the ATO – should it come knocking.

Couple the ATO crackdown with tighter lending regulations, higher wages, plus the first of what could be five pending interest rates hikes, and we could see a significant increase in wind-up notices over the next two years.

Companies traditionally in the cross-hairs of this tax debt conundrum tend to be within the financial and insurance, construction, professional/scientific services, agriculture, forestry, and fishing sectors. However, those with insufficient profit to service debt are also acutely exposed to higher interest rates.

It’s incumbent on any business to take active steps to minimise insolvency risk by getting better at budgeting, planning and cash flow management, and this typically means seeking outside help.

More often than not, poor cash flow is symptomatic of insufficient profit margins, which in turn stifles future growth. Poor business performance is one thing, but all too often companies trading with varying degrees of insolvency are trading blindfolded.

What they effectively lack are the financial systems and planning tools like online accounting systems that help monitor profitability in real-time, and not just once problems arise. As well providing an accurate snapshot of what shape the business is really in, planning tools will help you make more informed decisions about the health of your business and what it needs to start growing again.

While cash flow shortage should never come as a complete surprise, business owners can misread the significance of some actions they take, albeit against their better judgement.

Some of the tell-tale actions to look out for include late or altered super and tax payments, rising extended credit terms & overdrafts, redundancies and higher staff turnover. Similarly, if the number of days for outstanding for payments is increasing, and you’re also failing to meet GST, PAYG, and super payments – it’s a sure sign you’re badly in need of help.

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.