Australia: Insolvency guide to avoiding a festive crisis

Handy tips to avoid the 'Bad Santa' experience.

In January I wrote an article on the potential impacts of the post-Christmas trade with some tips to help businesses manage their cash flow and start off the new year on the right foot. The planning to ensure the business is in its best position during this period begins well before Christmas, sometimes months in advance. Here's a guide that may assist business operations to avoid a 'Bad Santa' experience.

Budget budget budget!
It is crucial that business owners invest some of their time over this period in budgeting and forecasting major cash inflows and outflows. The best data to budget and forecast is the months before and after the previous Christmas trade. Trends can be formed, and anomalies identified to raise awareness of vulnerabilities and effectively manage cash-flow risks where possible. It is also important to track how the business is performing against the budgeted forecasts and adjusting the budget and your cash flow decisions.

Make use of early discounts, and offer them too
A good cash-flow strategy, particularly those businesses with strong sales leading up to Christmas, is to pay down accounts on or before their due dates, especially creditors offering discounts for early or on-time payments. Vice versa, if you sell goods or services on account, offer the same incentive to boost the inflow of cash to pay unavoidable expenses such as rent and annual leave for permanent staff while trading is closed.

Be aware of who you are selling to
With increased sales comes new customers or existing customers who try to push their credit limits. Business owners may be in merry mood at this time of the year, but shouldn't take any shortcuts by not conducting credit checks and following proper policies and procedures for dealing with sales on accounts. Critically, credit application forms must be signed by the correct legal entity trading the business (e.g. if its trading through a trust) and consider obtaining security from the company and a personal guarantee from the director to reduce the risk of uncollectable debtors in the new year.

Limit the expenditure
At this time of the year, cash flow is crucial to cover essential expenses that drives income. Therefore, now is not the time to invest in new business opportunities or technology to innovate business processes. The focus should be driving revenue through limiting expenses that only contribute directly to generating this income. This enables businesses with quieter starts to the new year to use those surplus funds to explore those opportunities then.

Don't leave out the tax man
While obvious, commonly businesses don't set aside enough to pay their superannuation and tax obligations for the new year. The superannuation payment is due on January 28 and quarterly BAS statement due February 28 due to the seasonal reprieve the Australian Taxation Office (ATO) allows. The next BAS quarter quickly follows being due on April 28—just two months later. The recent uptrend in ATO winding ups and with small businesses being accountable for the majority of debt owed, small business owners must remain vigilant and on top of their lodgments and ATO payments.

External funding
It may be tempting for a quick cash grab from the bank (not a robbery) or the ever-increasing number of alternative lenders, but it's important to consider whether the short-term gain is just going to cause long term pain. Consider the pros and cons of short-term loans, business overdrafts, invoice or inventory finance, credit cards among an array of other lending types. Importantly, read the fine print for hidden fees and charges, and calculate how the interest rates and repayment terms will impact the cash-flow budget.

If family or friends are looking to chip in funds, ensure a written agreement is executed, and security is taken before the funds are advanced. It may come at a small cost now to ensure this is done properly but may avoid a greater pain later should the business run into trouble. Treat the family favour like any other professional business and arms' length transaction.

Planning

For the lucky ones that will get time for a well-earned break sometime during the festive period, reflecting on the year that has gone, how business practices could be improved and identifying what opportunities and risks lie ahead in the new year could be invaluable. Use the down time to formulate strategies that could help the business prosper for the year ahead.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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