Keeping your business solvent now and in the post COVID-19 economy
It’s no secret that for many businesses, we’re entering a period of great uncertainty due to the impacts of the COVID-19 pandemic. After months of some businesses receiving little or no revenue, the worst may be yet to come for Australian businesses.
Heavily affected industries like tourism and retail are already seeing high-profile COVID-19 victims announce administration, like Virgin Australia. The Richard Branson part-owned airline was revealed to have owed $5.3 billion to creditors, including clients like travel agents and bondholders.
Only this week Organic Dairy Farmers of Australia announced it was entering administration, with the impacts of COVID-19 directly referenced as a key influence in this decision.
If you are a business owner and your business is starting to feel the financial pinch, you may be wondering what steps you can take to try and avoid insolvency.
What is insolvency?
Insolvency is when a company is unable to pay its debts when they fall due for payment. The 3 most common corporate insolvency procedures are voluntary administration, liquidation and receivership.
- Voluntary administration is generally where the directors of a financially troubled company appoint an external administrator. The external administrator looks into the company's affairs and reports to creditors the best way to maximise the chances of getting their money back.
- Liquidation is the orderly wind up a company's affairs and involves selling the company's assets to repay creditors.
- Receivership happens when a secured creditor appoints a receiver to sell enough of the secured assets to recover the creditors' debts.
According to Australian Securities and Investments Commission (ASIC), the main signs indicating your company is in financial difficulty include:
- Ongoing losses
- Poor cash flow
- Unable to pay creditors outside of usual trading terms
- Problems obtaining finance
Directors of Australian companies have a duty to not trade while insolvent and doing so can bring civil and criminal penalties by ASIC. If you feel that your business is, or will soon be, unable to pay its debts as they fall due, it's important to contact your accountant immediately and they will advise the best course of action.
Below are some tips to help you avoid that situation and have enough cash flow and liquidity to meet your debts and keep your business on the right track.
1. Understand your cash flow, liquidity and working capital
A solid understanding of your business' current cash flow, liquidity and working capital position is important starting point before making any changes to your business.
All businesses should regularly update cash flow forecasts to determine future cash inflows and outflows and gauge the level of liquidity that is available to meet payments. There are some amazing tools available for cash flow forecasting or you could hack together a spreadsheet yourself. The main thing is that you forecast your cash flow in some way.
There are also a range of working capital ratios such as the current ratio, quick ratio and cash ratio which measure the ability for a business to pay its current liabilities. Monitoring and understanding all of these ratios well is important for knowing which levers to pull to make sure you will always have enough liquidity to meet your financial obligations.
2. Increase your cash flow
It may seem obvious, but in these unprecedented times, finding new and creative ways of increasing your cash flow is crucial to keep your business above water for 2020.
There are a number of Australian small businesses who’ve altered their business models to accommodate for the COVID-19 pandemic, with many sit-down restaurants switching to take-away-only service just to stay afloat.
Increasing your cash flow may be done in a number of ways, such as by selling underused stocks, or following up on any owed debts or payments by customers or suppliers. Now is the time to try and square off any income that is owed to your business, as you may need the extra working capital to get through the next few months.
You may even want to look at getting additional cash flow financing for your business through debtor finance or invoice discounting. Earlypay helps Australian businesses unlock cash tied up in unpaid invoices through an invoice financing facility. It acts as a line of credit from which businesses can draw up to 80% of their accounts receivable ledger.
3. Decrease your overheads
Another way you can try to avoid insolvency in 2020 is by decreasing your overheads.
To survive the financial ramifications of COVID-19, you may need to be ruthless, but hopefully only temporarily. Go through your list of business expenses with a fine-tooth comb and note any items that are no longer necessary, too expensive or could be made more efficient throughout the remainder of 2020.
For example, your business may benefit from reducing office supplies or even reassessing your current office rental arrangement during a time when most Australians are working from home.
There likely will not be a one-size-fits-all solution to reducing your overheads. So, you may need to look for a range of ways your specific business can reduce its overheads and improve efficiency, to avoid insolvency in 2020.
4. Seek assistance if possible
There is government assistance available to assist Australian businesses in surviving the impacts of the COVID-19 pandemic that your business may qualify for.
The Coronavirus SME Guarantee Scheme will support up to $40 billion of lending to SMEs.
Businesses struggling as a result of COVID-19 may be able to access government-backed business loans via approved lenders. Loans under the scheme:
- Are available up to $250,000 per borrower
- Do not require security
- Have up to 3 year terms
- Have an initial 6 month repayment holiday
To qualify for finance for the scheme, the business must have an annual turnover of under $50 million and be facing hardship due to the COVID-19 pandemic.
5. Consider the long term
Perhaps this is not the first time you’ve been concerned about your business becoming insolvent. That’s where a longer-term plan can be invaluable and working closely with your accountant is crucial.
Solvency, profitability and efficiency measurements may be useful tools in improving the financial health of a business. Using financial ratios, such as debt-to-asset ratios or net profit margins allow businesses to assess its current financial position, recent performance and determine its future direction. The Earlypay website now has useful resources for business owners for managing solvency, profitability and efficiency.
If you think that your business can benefit from Earlypay's modern debtor finance facility and would like to find out more, please contact our team today on 1300 760 205.