When you feel stressed about cash flow, your instinct might be to start cutting costs. But that’s not the best approach. Before you do anything to your cost structure, you should list every liability you have and categorize them by risk level – not amount.
Because the consequences of some debts go beyond the usual late payment chase-up from a supplier, put everything you owe or soon will into two piles. Those that could put you personally at risk – either through leases or equipment loans where you’ve given a personal guarantee or obligations that could lead to insolvency. And those that can’t.
Focus on the first list first, regardless of whether the sums involved are the biggest.
Don’t Wait For The Tax Office To Contact You
The most frequent error with tax debt that businesses commit is simply keeping quiet. Waiting to determine if the ATO will take notice, relying on a payment coming through next week, assuming they’ll give you some leeway – none of that is effective. Small business contributes around 65% of the ATO’s collectable debt, which hit $50 billion in 2022-23 (ATO Annual Report 2022-23). The ATO has the data and the willingness.
What most business owners aren’t aware of is the fact that the ATO does deal, but by the time they’ve escalated to formal recovery, the flexibility is largely out of the picture. Phone them, before a Director Penalty Notice comes across your desk, and you’re talking possible structured payment plan. Or, after, it’s a garnishee order on your bank account.
Call them, or get someone to call on your behalf. Honestly explain the position. Ask for a payment support arrangement. The ATO will usually give a better hearing to a business that shows it knows its obligations than one that stays silent and then disputes the debt.
Fix The Cash Conversion Cycle Before Looking For More Credit
Borrowing money to pay your employees or taxes is not an ideal solution. It’s best to explore internal sources of cash to cover short-term gaps. For example, if you have outstanding invoices that are more than 60 days old, consider offering your clients a discount if they pay earlier. This would be a cheaper alternative to taking out a loan to cover your expenses. In general, offering a 2% discount for early payment is less expensive than borrowing short term debt to finance the gap.
You can also reduce cash outflows by renegotiating payment terms with your suppliers. Non-critical suppliers would be a good place to start. You could also look at converting some of your business assets into cash, such as slow inventory or equipment that’s not being used.
Know When Formal Restructuring Is The Right Tool
If the debt load has grown to the point where internal adjustments won’t be enough, it doesn’t mean it’s game over. It might just mean the business needs a formal reset.
The Small Business Restructure (SBR) process allows eligible firms to propose a debt compromise with the directors remaining in control of the business. The SBR process works to keep the business operating while the entity’s unsecured debt is reduced to a level that it can afford to service. Companies seeking information on SBRs and tax debt specifically can access an SME guide to reduce ATO debt to explore how the SBR process interacts with ATO liabilities and how much tax debt can be legally compromised.
Size and liability thresholds apply and a registered liquidator must oversee the plan, but for a business with a viable core operation that’s been overwhelmed by a poor cash flow the SBR is a real option not a last resort.
Companies utilizing SBR and directors who pursue formal restructuring may also become eligible for safe harbour protections which give the directors a protection from insolvent trading liability – as long as there’s a reasonable plan for a return to solvency in place.
Cut Costs With A Scalpel, Not A Cleaver
First, focus on the liabilities that are actually going to put you in serious personal financial distress if you don’t sort them out: that’s any personal guarantees you’ve had to offer against borrowing for the business. Put a payment holiday in place or demand that the bank manager stands by the independent solvency advice you were supposed to have got on signing.
Communicate early, often, and with a plan. It doesn’t solve where you are, but it will stop creditors sending in the liquidators if they know you already have another solution on the table.
Then look at how you can squeeze cash within the business: don’t go looking for more credit until you’ve stopped every leak and run the business as low as you can on what it has coming in above immediate expenses.
That may involve costs. Useful distinction here is variable verses fixed. Fixed costs you are stuck with for a period – rent, software subscriptions, salaried staff. Variable moves with your activity, and therefore can be reduced without fundamentally changing what you do. Start there. Then with fixed costs, see what is up for renewal in the next 90 days. Don’t even talk to everyone at once – lean on suppliers and be ready to switch to competitive offers for those who you have leverage on (such as no long-term contract).
