Now is the time

Smart companies cannot afford to wait until the end of the year, let alone the end of financial year, to review liquidity, cashflow, or profit and loss. Do it now! COLIN BENJAMIN

By Colin Benjamin

As the sharemarket still scrambles to find a bottom and insolvency practitioners put out the welcome signs for lawyers willing to help failing small business, it is time for all smart companies to review the risks associated with doubtful debts.

When giants like General Motors and Chrysler are facing bankruptcy, it is obvious that every small and medium business must seriously consider the prospect that their customers may not be able to meet their commitments.

ASIC has seen a significant rise in the number of firms that called in an administrator as it became obvious that there were real risks of trading while insolvent. The number of companies that entered external administration in the last year has dramatically surged. More than 10,000 Australians have gone broke in the last three months and many more small companies are considering closing their doors as the financial crisis continues.

While there will be a rush of funds from the Federal Government’s $10.4 billion bailout and the RBA’s interest rate cuts; this will not hit the balance sheets of most small companies for some months. Many people are now being forced to delay retirement plans and decisions to sell their business for at least a couple of years and hoping that they will be able to get through to the good times due when Kevin has to face the people.

It is important to recognise that any company director, no matter the size of the business, has a duty to prevent their company from trading and incurring debt while the company is unable to pay debts as they fall due. This also means that directors cannot go out and borrow more funds to keep the doors open, because no new debts can be incurred where a director suspects that the company is likely to become insolvent.

Get your accountant, lawyer and top team together before even considering taking on more debt, extending lines of credit or deciding to just close your doors if your company is likely to be in financial difficulty over the festive season.

Make a realistic assessment of business risks and get professional advice on the best path through to the end of the financial year rather than assuming that Rudd’s bailout will make sufficient difference in the next few weeks.

Directors of smart companies should not wait until the end of this year, and certainly not until the end of the financial year, to review their liquidity, estimates of cashflow and profit and loss positions.

You cannot rely on hope in the face of adversity. Now is the time to seek insolvency advice, as a common reason for business failure is waiting too long in seeking a professional opinion on the options available including restructuring, downsizing, and refinancing with banks that are now a little more willing to consider your longer term position.

Companies need to look at the potential benefits of voluntary administration, deed of company arrangement or even voluntary liquidation as a last resort option after taking professional advice.

Members voluntary liquidation is a way out for companies that have decided to cease to trade in the current volatile market where there are still some profits to distribute, but is only available if you are sure that you are still likely to be trading as a solvent company.

There are serious consequences for letting your business get to the stage where someone can show that it is unable to pay all of its debts as and when they fall due for payment. There are big penalties and barriers to running any company that can flow for allowing a company to trade while insolvent.

While there is still a freeze on non-bank institutions and most companies are cutting back casual staff and new business investments, it is important to adopt a prudent perspective on any new entrepreneurial strategy until next financial year and revise all business and marketing plans accordingly.

Dr Colin Benjamin is Entrepreneurship and Strategic Thinking Consultant at Marshall Place Associates, which offers a range of strategic thinking tools that open up possibilities for individuals and organisations committed to applying the processes of innovation, creativity and entrepreneurship. Contact: CEO Dr Jane Shelton. 

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