You can't run a business without encountering risk. There's a reason the Australian Securities and Investments Commission recorded more than 800 corporate insolvencies in August this year alone . While some wind up naturally, others will run up debts that quickly become insurmountable, forcing them into a liquidation process.
It could be debt to the Australian Taxation Office (ATO), lenders or creditors – but the debt itself isn't the issue. For many businesses, debt is essential to growth. It's how you manage it that counts. Here are five steps for any business that needs effective corporate debt management.
1) Reduce your expenses
Do you know your benchmarks? Or your break-even point? These are key figures for small businesses, no matter what industry you are in. Run your fixed costs against your gross profit to get a general idea. Some state and territory governments have specific tools for businesses to help them determine these key numbers.
From there, it's a matter of changing how your company operates. This could mean leasing less office space, adjusting staff capacity or removing plant and equipment that is surplus to requirements.
2) Prepare a cashflow forecast
Plan out your revenue and expense cashflows, together with tax and capital cashflows for at least the coming three months.
You should then try and keep as close to due dates as possible. Match invoice cycles with wage cycles, and chase up funds you are owed. Dun & Bradstreet research shows that in the June quarter of 2016, businesses took an average of 44.9 days to pay invoices – cutting this down helps you keep to forecast and in control of corporate debt.
3) Tailor your finances to your business
Finding the right type of credit for your business model is essential.
There are many kinds of financing that company directors can employ: invoice finance, business loans, equipment finance and overdrafts, to name a few. Finding the right type of credit for your business model is essential.
Credit cards generally have high interest rates, and may not be suitable for longer-term debts. According to the Debtor and Invoice Finance Association, Australian turnover for their industry increased 2.8 per cent over 2015 to reach $64.4 billion – clearly a popular option for many. Check interest rates and consolidation opportunities for efficient debt management.
4) Improve your communications
No matter how well you manage corporate debt, it can still get out of hand – ASIC recorded a 7.3 per cent annual increase in external administrations for 2015-16.
For company directors, the key to corporate debt management when it gets out of hand is communication. Talk to the ATO and your creditors about payment arrangements that are feasible. Everyone faces financial difficulty, and meeting creditors halfway can establish trust and security.
5) Use pre-insolvency advice
Corporate debt management isn't a process you have to work through on your own. Professional accountants like the team at Cactus Consulting are here to help you develop pre-insolvency strategies for managing, resolving and staying on top of business debts.
There's no need to let credit get out of control – address it early to give your business the best possible chance of continued success.