Overcoming Short Term Cash Flow Problems…

Consider the following options to assist in overcoming short term problems. The list is not intended to be complete, and not all options are valid for every business. This is general information only and not advice. Since your circumstances have not been considered, you should work with your accountant or give me a call for advice specific to your business if you are worried about your cash flow. Some of the options below have longer term cash flow benefits and represent good house-keeping for any business, even cashed-up ones!

If cash flow problems are not just short term the business may be insolvent. It is a breach of directors’ duties to trade while insolvent and advice should be sought regarding this. How do you know if the problems are just short term? Your cash flow forecast and budget will tell you. All businesses should have these key documents and review performance against budget at least monthly. ASIC, the Australian Securities & Investments Commission, list a “lack of cash-flow forecasts and other budgets” as one of the key indicators of insolvency – see http://asic.gov.au/regulatory-resources/insolvency/insolvency-for-directors/directors-is-my-company-in-financial-difficulty/.

Financing

  • Consider additional bank finance or short term loans
  • Refinance equipment on longer leases, or borrow against unencumbered assets (ones owned outright)
  • Contact a ‘business angel’, if you can find one. Consider major customers and suppliers who may need you as much as you need them

Suppliers

  • Delay tax payments and make an arrangement with the ATO and/or Office of State Revenue. They are very understanding, but keep an eye out in particular for a ‘director’s penalty notice’ and it is important to stick to the arrangement once you have made it or they may not be as understanding next time. You only have a few days to act on director penalty notices to prevent becoming personally liable for a company’s tax debts. It is also important to lodge tax returns and activity statements on time even if you can’t pay them in full to avoid becoming personally liable in some cases.
  • Contact major suppliers and ask if an arrangement can be made to pay debts off over time
  • Delay purchases, where possible, especially near the end of the month if they can be delayed into the new month if your terms are “30 days end of month”
  • Can stock be obtained ‘on consignment’ so it is only paid for once sold?

Customers

  • Set up a standard approach to debtors and pursue with painfully politeness persistent
  • Offer discounts for early payment, but beware being too generous and damaging margins
  • Do credit checks on new customers, and don’t be afraid to turn them away. If they can’t pay you, they are not a customer!
  • Consider debtor’s insurance, especially if you have a small number of larger customers rather than a wide spread of customers
  • If customers pay by instalments, restructure your instalments for new contracts to bring payments forward
  • Ask customers for a deposit on larger jobs
  • Increase marketing spend to protect margins and win more work
  • Look at product and customer mix, and target the customers and jobs that bring in cash the fastest

Assets

  • If an asset is not being used, or is underused, sell it. This is usually a valid house-keeping decision even if there are no cash flow problems
  • Sell and leaseback major assets or buildings if this is a cash flow positive option or if it will free up equity
  • Sell scrap or reduce stock holding

Last resorts

  • As a last resort, for short term use only, consider debtor funding or funding on stock purchases. These options are expensive and, except for a minority of industries, for emergency use only (in my opinion)
  • Sell a portion of the business, or the whole business
  • Reduce staff, especially administrative staff, or reduce their position to part-time. There may be redundancy costs and be careful to retain key staff that you need once business picks back up. While this may seem harsh, it is better to sacrifice a couple of jobs, rather than lose the lot
  • If the problems are not just short term, or margins are not sufficient to cover costs, urgent action may be needed to minimise the risk of trading whilst insolvent. The earlier help is sought, usually the better the result for the directors and creditors

If you need further help, please email me at info@coastconsulting.com.au for support. John

Coast Consulting