The holidays are over – Early action when in financial distress.

We have enjoyed our holidays, are back to work and the kids have returned to school. Now the focus is back looking at your business.

We have enjoyed our holidays, are back to work and the kids have returned to school. Now the focus is back looking at your business. The last few years have seen some difficult times but as the economy has normalised, albeit with some expected inflationary pressure and interest rate rises, the level of uncertainty remains. The cost of doing business appears to rise every day and as we monitor our trends around expenses and see greater pressure around revenue generation, we are seeing our margins and ultimately our profit shrinks.

Many Australian businesses are currently facing a perfect storm. Interest rates and inflation are rising, resulting in an increase in the cost of doing business. Revenue, on the other hand is falling, profits are being squeezed and debtors are getting harder to collect. The behaviour of both our creditors and debtors are changing. Debtors are slowing payments. Creditors are chasing us more often for payment.

For your business, the bank account is lower, the government stimulus is long gone, and our working capital is deteriorating. The kicker is… the ATO, banks and landlords provided some debt extensions during Covid. These are now overdue and debt collection has commenced. Cashflow has a dual front to deal with. Higher costs, greater revenue uncertainty, and for some businesses, the catch up remains from the Covid period.

Some businesses were not only impacted by Covid lockdowns, but natural disasters as well. This all comes together as a big financial storm, creating financial stress, which may result in insolvency if not handled properly.

It is critical that as either advisor or the director of the company, the obligations to avoid insolvent trading exist. A company is insolvent when it cannot pay its debts that are due. Company directors have a statutory obligation, to prevent incurring a debt if the company is insolvent or becomes insolvent by incurring that debt. There are serious penalties for allowing a company to trade whilst insolvent.

Company directors must keep themselves informed about the financial affairs of the company, including the company’s solvency. They should take positive steps to determine the company’s financial position. They should also seek advice on the options available, to deal with the company’s financial difficulties, from an appropriately qualified person such as a restructuring practitioner. Finally, the director should then act appropriately on that advice in a timely manner.

If you are a director of a business facing financial stress, then this may sound very complex and difficult. So, what do you do? You must act quickly and get help from trusted advisors, such as your accountant or solicitor. If you are an accountant or advisor of a company facing financial stress, reach out to your clients and offer help immediately. This is the time they need you the most.

Cathro & Partners are experts in providing insolvency and restructuring services that help to create and preserve business value. Cathro & Partners is a boutique firm specialising in restructuring, turnaround, insolvency, safe harbour, secured enforcement services and pre-lending services.

John Laird leads the Cathro & Partners Government Advisory division.

For more information, please contact:

John Laird, Cathro & Partners

Ph: 02 9189 1718

Email: john.laird@cathropartners.com.au

(Reference: ASIC Regulatory Guide 217 Duty to prevent insolvent trading: Guide for directors dated August 2020)

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