Insolvency may not mean "The End"

Introduction

This is a tale of both sorrow and happy endings.

Businesses are a bit like humans - they get created and alas too often they fail and die. Often the cause of failure is insolvency; the inability of a business to pay its debts and being unlikely to be able to do so.

An example

Years ago, when I was meeting a prospective client, it came up in conversation that the client's business was having financial difficulties and struggling to pay its suppliers. I suggested that he speak with an insolvency practitioner. In typical Aussie style he said "She'll be right. We will trade out of this with the next projects". I left him to it.

A few months later, my telemarketer called me to say that the same business owner wanted me to visit again. I duly did and discovered that the business was further in the red, and unlikely to recoup its losses in the near future. This time, he agreed to go and meet an insolvency firm in the city for a no obligation chat.

The outcome was that business went into liquidation. The poor man lost his family home and separated from his wife and kids.

It does not always have to end this way.

What can happen in a Business

All businesses face hurdles from time to time. At the moment, there are a few extra challenges, and these include:

• Environmental factors - disruptions from Covid lockdowns and sick staff, storms and floods.
• Interest rate rises - resulting in increased business and consumer outlays (cash flow impact), and the twin effect of reduced business from consumers.
• Wars - affecting business cost increases which cannot be passed to customers.
• Supply Chain disruption - reducing sales and profits.
• Business collapses with domino effects, e.g. large construction company collapse can destroy subcontractor businesses.
• Tax collection - the ATO is resuming its debt collection of outstanding taxes. In 2021 this was estimated at $60 billion; there was a moratorium on collections during the first two years of the pandemic.

One or more of these factors can have the effect of shutting down a business.

What to do

Business can be stressful even in good times. When a business is facing a chronic inability to pay its debts when they become due, the best thing for the owner to do is to reach out for advice and help. The earlier the owner acts, the better the likelihood of the business pulling through.

1. Corporations law requires company owners and Directors to ensure that their business maintains solvency.
2. It is generally acceptable for small businesses to arrange payment terms with the Tax Office for quarterly BAS Tax obligations. You do not have to be insolvent to do this.
3. Act early! Talk to your Tax Accountant or lawyer. They will be able to review your situation and refer you to an Insolvency practitioner.
4. Like medical practitioners, not every Insolvency practitioner is the same. Professional services is about you feeling comfortable with the expert and being able to trust and work with them. They will readily have a no obligation advisory meeting with you.
5. Insolvency is not a stigma in modern business. Things can happen which are outside of your control with drastic negative effects on your business.
6. It is common for business owners to feel disappointed and stressed. Emotions are OK. Importantly, work to regain your sense of balance and focus on the present and the actions which you can take, especially with the guidance of the Insolvency specialist.
7. The Insolvency specialist has a number of options which include:

• Business Turnaround - helping you to trade through profitably and generate cash to pay off debts. This may involve restructuring debt and organising better payment terms with suppliers and the ATO.
• Voluntary Administration (VA) - the Insolvency specialist takes over administration of your business and debts. The business keeps trading and stays in administration for period to be determined. Benefits include - stops insolvent trading, Director's statutory protection from legal action, agreement with creditors to pay them off; at least in part, and return the business to profitability. ASIC is notified when a VA occurs.
• Liquidation - where there is an unrecoverable situation, the Insolvency specialist will take the company through liquidation.

Can it end well?

Yes, there are many situations where a business survives insolvency, by undertaking turnaround and administration and go on to commercial success. I worked with a client once where we did the painful walk to the Administrators office for advice, and the client worked through 12 months of Administration, successfully paying off the agreed reduced debt.

10 years later, that same company was sold to a multinational for a significant amount to the happy owner.

Disclaimer

The above information is of a general nature. There is much more legal detail in insolvencies. Any reader facing insolvency must seek proper advice from an accredited Insolvency practitioner before taking any action. Should you need a referral, this writer can suggest a number of Insolvency practitioners.

Get Your Business Robust - Quick Tips

1. The secrets to a successful robust business are:

• A sound business model. You have products and services which customers increasingly want to buy at prices which generate cash greater than all your costs.
• Continually updated cash flow forecasts. This is like the fuel gauge in your car; it prompts you to take early action. Some industries necessitate weekly forecasts. Cash is always the top priority.
• Continuous marketing and sales to keep bringing in paying customers.
• Continuous cost control. This is where you can make higher profits and cash and also where you can go broke.
• Always keep extra cash in reserve for rainy days.

2. Always be looking for opportunities to build up sales and profits.

3. As your business grows, so does risk increase in different ways.

• Seek the services of a CFO. A good CFO is experienced in the different strategies and action steps required to grow businesses. This includes Finance, HR Management, Technology, Marketing, Sales and Operations Management.
• Surround yourself with the best help - inside and outside the firm.
• When "stormy weather" arrives, it is important to see it coming as early as possible, take advice from experienced specialists, and most importantly take what you consider to be the best courses of action.

SUMMARY

To quote a client, you get paid the big bucks when you have your own business. However with increased rewards, there is increased risk and responsibilities.

When your business is facing difficult challenges which impact on liquidity and solvency, take the best specialist advice and appropriate action. Early action will hopefully see your business sail through stormy waters safely and emerge relatively unscathed.

Business can be stressful and more so in challenging times. It is vital to look after your health and fitness. This will help you to navigate the challenges more effectively.

All the best!

Frank Choy, 20 July 2022