We’ve been hearing about it in the news on and off for years, but it seems to have amped up in recent months – businesses being wound up and going into administration/liquidation. Despite the media playing up those business owners that walk away, dumping their creditors, staff and others in the muck only to start-up under another name – that’s not usually how it happens.

Sometimes administration is done on a voluntary basis – the business owner wisely and often sadly abides by their director’s duty to call in the administrator to resolve the company’s future direction as swiftly and cleanly as possible. I want to stress here that it’s usually after trying to turn things around, many, many sleepless nights and much angst on the part of the owners.

This year though, the media has highlighted a lot more involuntary wind-ups – where the ATO has put technically insolvent businesses into administration – especially those owing some larger chunks of the ATO’s $3.1 billion tax debt from small business. And whilst everyone has an idea of what an insolvent company is, and has probably heard it’s illegal for your company to trade whilst insolvent – few understand the realities of it. Hence when the ATO comes knocking with the proverbial ‘closed’ sign – it can be a bit of a shock.

Even just last week one of Australia’s largest debt collection agencies suggested that up to 50,000 firms could be trading whilst insolvent. (source)

So what is it and what are the signs you might be headed in that direction? And better still how can you avoid it altogether?

In essence trading whilst insolvent means carrying on in business when you don’t have enough money to pay your existing debts when they fall due. Sounds simple – but many business owners don’t realise that also includes their tax and super obligations. There are serious penalties for directors that continue trading – up to $200,000 and that’s not including compensating creditors or the criminal fines/jail time that gets handed down from time to time).

  The markers of businesses heading towards insolvency are things like;

  • ongoing losses
  • poor cash flow
  • no business plan
  • liabilities higher than your assets
  • incomplete or disorganised accounting procedures
  • problems obtaining finance
  • overdue tax or super liabilities

So how can you avoid having to wind-up? Here are our three top tips to avoid it.

Keep a close eye on your financials – when you stop keeping a tight watch on cashflow and your P&L – that’s where problems happen. According to ASIC (and we concur) understanding your company’s financial position only when you sign off on your yearly financial statements is insufficient. We suggest you make sure you’re watching your numbers on a monthly basis at the bare minimum. If you’re unsure exactly what those numbers mean – ask your accountant for clarification.

 Seek advice BEFORE you need it – one of the most commonly cited reasons companies succumb to financial distress is professional advice was sought too late. Working with a good accountant, who works with you on more than just your company tax return, can make a huge difference in helping you understand your numbers and what they really mean for both you personally and the long term viability of the business. They’ll also help you navigate a way through tougher economic times by asking questions you may not have thought of.

 Don’t break the deal with your lender of last resort

Many business owners think of the tax office as their business’ lender of last resort. When there’s a hefty tax bill they can’t pay – they make a payment arrangement with the ATO. The problem lies with the fact that some 50% of payment arrangements have been defaulted on in the last few years and small business makes up more than 60% of defaulters. Hence the tax departments are now coming down hard on serial defaulters – stepping in to start liquidation proceedings.

If any of the above sounds even the slightest bit familiar – we can help. Even if you just want a conversation or a second opinion, please feel free to give either Greg or I a call on 6023 1700.

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