Beware the Christmas Cashflow Grinch

As we rapidly head towards the Christmas break it is a timely reminder that it can be a stressful period for two main categories of small business owners.  They are the ones that rely of the festive season retail sales to generate the bulk of their profits, whilst the other end of the spectrum are those that are faced with a period of large payroll costs at a time when revenues are not being generated.

As insolvency practitioners we see both categories of SMEs prior to the end of the year exhibit signs that prospering into the following calendar year may be problematic.  For example, the retailer suffering working capital deficiencies may be unable to offer a full range of products to its customers.  Some businesses related to the building industry may not have sufficient cash reserves or reliable inflows to see them through into the New Year.

A common theme often presents in both circumstances which is the lack of budgeting and forward planning before a small business is in the eye of a storm when creditors are pressing for payment, especially the taxman.

This blog seeks to highlight some key matters for advisors to keep on top of to help their clients weather the potential cashflow shortfalls.

The taxman does not take holidays and often formal proceedings are initiated prior to the very end of the year.  The taxman has never before had such a large number of tools to select from to advance the recovery of money.  Whether they are Statutory Demands served on companies at their registered office or Director Penalty Notices (“DPN”) sent to a directors residential address as listed with the Australian Securities and Investments Commission (“ASIC”).  We highlight the importance of ensuring that addresses are up to date with ASIC.

In addition, advisors who may also serve as the registered office for their clients, should ensure that systems are in place to identify correspondence received during the holiday period including the period leading up to it.  We have seen situations where advisors take a well earned break and their office has not dealt with client correspondence in a timely manner or at all.  Advisors should also make their clients aware that the taxman may serve a DPN as a first step in formal recovery proceedings and failure to address the demand within the specified timeframe of twenty one days can have significant consequences such as personal liability for the amount of the DPN.  Also don’t forget that garnishee notices served on bank accounts can have a crippling effect on working capital.

If your office is closed during the holiday period, notices with a 21 day due date such as DPNs and Statutory Demands that are posted just prior to going on your break may not be complied with if you don’t have a system in place to deal with incoming postal correspondence.

The following are some common steps that advisors can take to assist their clients during these periods:

1. Ensure that appropriate cashflow budgets are prepared on a timely basis or risk driving a business in fog. When businesses are facing cashflow difficulties a properly considered three month cashflow budget at a minimum will help directors make informed decisions that may save the business.
2. Encourage clients to meet with their major customers; ask for payment of invoices that have fallen due and better understand how the dynamics of their business may in fact be changing. Too often we hear directors say that they were too afraid to ask for payment from a customer for fear of upsetting them or putting them to inconvenience.  There is no point acting as a free overdraft for debtors and a client carrying uncollectable invoices in a balance sheet that creates a false impression of financial health.
3. It follows from the first two points that any working capital deficiencies should be identified. This is where the experience of advisors comes to the fore.  Many directors think that the main solution is simply to borrow more money by drawing down on equity in the family home.  Sometimes this is the best solution however there is no point mortgaging personal property to invest in a company whose business is not profitable.  However, where third party money is injected into the company, consideration should be given to taking appropriate steps to secure these advances including registering on the PPSR.
4. It is a well established axiom that the term of external funding from financial institutions and suppliers should match the cashflows of a business. It is a common trait of businesses that we see at the very distressed end that the proportion of short term funding to prop up non-current assets is way out of line.  An advisor should keep an eye on the mix of funding and the reasons for the changes.  A very common theme is trading losses which directly erode working capital reserves.  We have seen numerous examples where company directors have obtained without the assistance of their advisor, short term funding (often online) at 1% per fortnight, which to the unsuspecting appears cheap, but equates to 26% p.a.  Added to this is a penalty rate of 2% per fortnight (52% p.a.) and security includes a charging clause over a director’s house.
5. Well run businesses have a habit of invoicing their customers on a regular basis that is underpinned by good processes and accuracy ensuring customers have no reasons to dispute the invoice. Invoicing frequently and timely, especially in the building industry, means that customers don’t get surprises and are more likely to be in a positon to meet the obligation.
6. Another sleeping issue can be a build up in trading stock holdings that sit there not generating cashflow and in technological and seasonal businesses may be losing value or obsolete very promptly. The lead up to the end of the year can be an opportunity to critically assess stock holdings and sometimes make the hard decision to move it on by offering appropriate discounts.

These are just a sample of the many steps that can be taken by small business to improve cashflow.  Each one on its own is important but an advisor guiding a client by addressing a combination of them can have significant impact.  Sometimes advisors meet with us and their client so that the client can understand the consequences of failing to address these issues.  If we meet early enough, the business may have the time to turn things around.  Sometimes it is knowing the reality of a situation that is the impetus needed for a director to make a hard decision.  This is a very personally rewarding aspect of our work.

Advisors that are close to their clients are adept at seeing the warning signs early and developing timely strategies.  Great advice received too late is of little utility.