Ideas & Stories

Desperate times may require desperate measures

We can finally see that this virus is not going away in a hurry. The eb-and-flow of the economy from the cycle of infection, calm and reinfection is likely to bring once great businesses to their knees. Until the rescue from an effective antivirus arrives, business is going to remain really tough. For some, it will be too much.

If your business is facing disaster, what are you meant to do? How long should you wait before you act? When is it too late? What are your legal responsibilities? What determines how long you can last? At what point is it a fire sale? Is there any other way out? Are you throwing good money after bad? Could you even go to debtors’ prison?

Tough questions actually. Too tough to answer alone.

This is probably the most important time ever to engage with your business’s advisors. This is the time that their advice might make the difference between a bad
experience and a total loss of everything that you and your family own.

So, at what point would you simply close the door? How will you know if the time has come? What things should you consider?

It all depends… how bad is it?

  1. Really really bad. Then perhaps the best place to start is your legal responsibilities. In short, directors of companies have an active responsibility to ensure that their company does not trade if the company is unable to meet its financial commitments as and when they fall due. This is the scary bit and if you are worried that you may be trading insolvently, you might want to read ASIC’s advice on what steps to take.
    This is not a concept about profit. It is probably more about cashflow. If you have sufficient cash to pay the creditors as and when required, you may still be okay. Maybe.
  2. Really bad. The next place to look is those financial obligations that pass through the corporate vail to you personally. These might include superannuation obligations, PAYG withholding and GST that the business has incurred. They may also include any business obligations that arise whilst trading insolvently (as in 1 above).
    Included will be those obligations for which you may have provided a personal guarantee. Leases, make-good clauses on rental properties, bank loans, lease and finance agreements, supplier agreements and the like. There are lots of these types of securities, many of which you may have forgotten about.
    They won’t have forgotten you though. Sometimes, even closing the door is expensive.
  3. Just bad. Look at your financials. They tell a story. Not just the end of year accounts that support your tax returns. We mean the monthly accounts which show how you travelled in the previous 4 weeks. We mean the daily or weekly Key Performance Indicators (KPI’s) which show the most important drivers for your business… gross margins, sales trends and analysis of visits and buys, productivity and headcount and of course, those all-important working capital numbers.
    They speak a language that tells the story of how you are really going and what position you are really in.
    That story can be overlaid to the current world and your possible future paths. Is there a light on the horizon? How achievable is it? Do you have the resources to reach that place? Will government subsidies provide the difference should they remain (or become) available?
    Have you tried everything? Check our previous article on Razor Gang and our Downturn Survival Guide for a checklist of ideas and initiatives.

This is where your advisors show their skills.

Seen in the proper light, your advisor can objectively analyse all of this mess and help you understand where you are at. We were once told that the complexity felt like “spaghetti in your head”. That clarity, understanding and reassurance that comes with an experienced and objective voice can make the difference between a good decision and a bad one. Or perhaps, a decision you might have made anyway, but with a lot more confidence.

At some point, if things are (or get) really really bad, it may be necessary to take the steps down the path of insolvency. Hopefully not. Years ago, we had an Insolvency Team as part of our practice, and we watched from the sidelines as many people went through the heartbreak of losing their businesses. For some, there was relief when it was all over. For others, there was sadness. But for most, they get on with their now very different lives.

But of course, that may not be your future. Indeed, with the right advice, you may get past this point in time and as you probably know, the survivors from tough times emerge stronger and ready to seize the opportunities that start to present. The good ones put those plans in place early. Again, the good advisors are right behind them and help them make the best decisions.

Obviously, if your advisor does not have what it takes, you know who to call!

Take care.

Chris Alp & Andrea McNamara