Accountant Selection Tips

7 Secrets for small businesses battling liquidity problems

By January 19, 2021No Comments
7 Secrets

If you are a business owner battling liquidity problems then knowing these little talked about secrets are a must.

Liquidity Problems are scary. You have put blood sweat and tears into your business, maybe even your house and at this point in time, all you can probably see as you lay awake at night is the possibility of loosing it all.

Geoff Richmond, Seasoned Accountant, shares with you his experience of going into battle on behalf of clients and what you need to know to equip yourself with the best possible chance at rising from the ashes.

1. Don’t wait until you can’t pay wages before you seek advice
Many small business owners are bogged down with the day to day issues with running their business. Don’t be embarrassed you are not alone!
The easiest thing to do is convince yourself if you simply work harder you will be able to turn it around and so you ignore all the warning signs, like you haven’t paid the ATO for 2 or even more BAS’s.

2. Seek financial advice from your accountant or one who is able to analyse your numbers and find root problems and suggest solutions
Warning: Many accountants are either too busy to devote the required attention to this type of problem or lack the skills or experience to be able to truly help.
Consult the right financial advisor and ask him/her to give examples of how they have helped others with liquidity problems before.

3. Keep communication channels open with creditors
The worst thing you can do is to hide from creditors. They will only assume the worst if you avoid them and they don’t hear from you. The next thing you will have a summons or receivers on your doorstep. Above all be honest with them and don’t make promises you can’t keep. They will appreciate you telling them you can commit to $50 per week but can’t commit to $500 as you know you will let them down if you try.

4. If you need to arrange a payment plan for creditors try and treat all the same
Sometimes this isn’t practically possible as some suppliers may be the daily lifeblood of your business and will stop supply immediately if not paid. However, if any creditor feels they are being singled out as the last to be paid they will take a much more aggressive approach to their debt.

5. Ensure you protect your personal assets against any failure of your business
You may well need to call on family, friends or your retirement nest egg to prop up the business, it is very important that these advances are properly documented and secured. Again seek advice from the right professional.

6. Work on your cashflow rather than just Profit
Long term profitability is essential for a viable business but you would have heard the saying “Cash is King” and it is never more relevant than in this instance. Start thinking strategically about all your transactions and identify if you can create cash quicker. Debtors may be receptive to paying within 7 days for a 1 – 2% discount. Even paying 5% discount fee could be cheaper than some of the loan shark deals I have seen businesses forced into.

7. Never visit an insolvency practitioner without an experienced advisor assisting you
If things get to the stage where you need the assistance of an insolvency practitioner (liquidator) then you need to be aware of a few important factors:

  • When they act they expect to earn significant fees
  • Unless your business has a low risk of being able to trade and be turned around while paying them many thousands of dollars they will inevitably recommend liquidation
  • If they give you advice that may preclude them from being able to act in any official administrative role for you (which means they won’t earn any fees – you draw your own conclusion)
  • If they are appointed as liquidator or administrator of your company they are precluded from giving you any advice and must act in the best interests of your creditors

With that in mind you need an experienced advisor helping you negotiate with the insolvency practitioner. There are much lower cost options that can be implemented resulting in creditors achieving a better benefit and you potentially salvaging your business or protecting your personal assets.

Below are some Case Studies I have witnessed which highlight how bad things can go if the right advisors are not assisting you. Cases 1, 2 and 3 are ‘train wrecks’ that could have been avoided and Case 4 is a more positive scenario.

A company was placed in Voluntary Administration and the directors dealt with the administrator without assistance. When I met with one of the directors he advised that the administrator had convinced them to put forward a DOCA (Deed of Company Arrangement) where creditors received 100c in the dollar. What’s more he was advised that his mother ,who injected cash to help out a few specific creditors, couldn’t participate in the 100c in the dollar dividend. At least I got his Mum’s dividend sorted out but I was too late to help with the 100c in the dollar.

Some may argue why shouldn’t he pay 100c in the dollar? I have helped directors who have done just that but to be told this is the only option by the administrator is not how it should work. This could jeopardize the outcome for all if the company cannot actually afford 100c in the dollar and creditors may receive much less if the company fails to uphold the DOCA.

The purpose of a DOCA is to ensure creditors are better off than if the company was placed into liquidation. This is where the director needs assistance to design an outcome that will help creditors and also salvage a future for him or her and their family.

A company had a debtor finance facility and was looking to restructure as a result of its poor liquidity position brought about by the collapse of a major customer.

After the business set the plans in place the debtor finance company decided to terminate the arrangement which entitled it to invoke certain fees and appoint a receiver. The debtor’s ledger was so strong it was able, by normal collections, to pay out the financier within weeks. This was even though the ledger was $90k when the receiver was appointed and the financier slugged the business with an additional $70k in fees and costs!

I was working with a business where the owner caved in to the pressure of his liquidity problems. I personally think the business was salvageable but the husband and wife team had simply had enough stress.

One weekend the director flicked through the yellow pages and found a liquidator who he called first thing Monday morning. The liquidator advised they would act and asked for $20,000 for each of the 2 companies to act as liquidator. The director paid the $40,000 and the liquidator was appointed. After the appointment, the director discovered that the liquidator was actually based in Melbourne and needed to incur a great deal of additional costs to travel to Adelaide to convene meetings etc, etc.

This explains the need for such high upfront fees when the companies had assets that would have been sold and covered the appropriate fees for a liquidator … I am at a loss as to how creditors interests were looked after in this case. An Adelaide based liquidator would have taken on the assignment for possibly no upfront fees and definitely at a maximum of $10,000 per company.

I had a new client referred to me, John who ran a Service Station, one of the early adapters like the current On the Run’s. He came to me because he was going broke and his accountant told him to sell up for whatever he could get, as the business was a lemon.

On the surface the margins did look OK compared to industry benchmarks but it just didn’t make sense that this type of business was not making a reasonable profit.
I looked at his numbers and asked him to go away and get me some extra information and pretty soon discovered that he was selling some stock at way below his expected margins. Together we eventually broke it down to his milk sales of all things. It turns out he was selling milk for less than he was getting charged by Farmers Union.

The bottom line is the night manager had teamed up with the milk delivery guy and they were doctoring the invoices and splitting the profits costing thousands of dollars a week back in the 1980’s. He sorted that out ran the business at a healthy profit for a number of years, eventually sold and bought into hotels before the pokie boom and did very well thereafter.