This morning I read an article by Nexia Accounting NZ, advising that the NZ Government has ended its support to business during the Covid lockdowns.   The withdrawal of support, high inflation and low business confidence has raised pressures on NZ businesses and there has been a marked increase in   inquiries on 'Insolvency'.

Is this relevant to Australia?   ASIC provides weekly reports on the levels of company insolvency.   What the graphs show is that the level of insolvency is increasing quite fast from around 700 a month towards 900 a month, for a total of 4,900 this financial year to date.   The industries most affected are Accommodation and Food, Construction (30% of the total), Manufacturing, and Services.

The Reports though do not tell us the reasons for insolvency.   Debt recovery action by the tax office would certainly be one, over 100 Director Penalty Notices are issued daily and sometimes the only recourse is liquidation, cost increases, difficulty in attracting staff or sourcing materials, slower discretionary spending, and simply 'cash flow problems'.

What we can see from this is that there are more businesses affected than usual, and at the moment the problem is more acute in certain industries.   So, what should businesses do to ensure they thrive under the current and future economic conditions?

Cash is King

Businesses need strong cash flow and access to cash.   Those who are struggling need to carefully assess their business model to find out what is blocking their cash flow.

Examine Lines of Credit

Look at the lines of credit extended to clients (terms, amount, etc.).   It may be growing, even out of control.   It may be evidence of growth but also means more stock to hold, more overheads, even quicker payments to suppliers.   Perhaps change the terms of credit, and/or seek finance based on Receivables to secure a smoother or regular cash flow.

Vet new Clients

Do some background research on new clients before working together.   Do they fit your ideal customer profile, are they in a stable financial position?   They may owe large amounts to previous suppliers, why did they switch?   If you do work, will they pay on your terms, could the payments be a preference and recoverable by those prior creditors?

Avoid Ageing Debtors

Statistics show customers taking longer on average to pay accounts.   Chase up overdue accounts quickly.   It is unpleasant and something we'd rather not do, but it is your money and your business that must be protected.   Make allowances if genuine, but as a one-off, and re-state the future terms of payment.

Invoice Regularly

Invoice as soon as possible in the workflow cycle, full payment due on (date), or a deposit, a claim each 14 days, balance in full on delivery or completion.   Much of your business cash flow likely depends on invoicing, there are no fixed rules for this function, you can have different terms for various customers (past performance, yet to establish credit worthiness, short term smaller debts, etc.).

Understand the Financials

Owners need to understand how the growth of the business will be achieved, the effects that will have on revenue, costs, debt and repayments, and working capital (stock, cash, debtors etc.,).   One of the most important things that businesses can do is to create a cash flow forecast, which anticipates the cash needs and identifies potential cash flow problems before they occur.

Cash is the issue that means the survival of your business.   Conduct an analysis of your processes and systems, ensure they are working properly, seek advice or support, and solve weaknesses before they get out of control.   If addressed early, insolvency and those big costs are usually avoided.

If you seem to be having difficulties, contact us and discuss options that may assist you to improve the situation.   It's better to do this now while there are options, rather than leaving it too late to take effective action.