How does a company struggling with cash flow restructure?


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How does a company struggling with cash flow restructure?

Business owners are constantly looking for ways to keep their business performing well.  This becomes more challenging when they are experiencing financial difficulty.

We often hear that “companies should look at restructuring” in order to turn a financially distressed struggling business into a successful profitable business.

However, this is easier said than done.

Given our current accounting standards, employment law and ATO collection obligations, it is often difficult for companies to achieve this much vaunted restructure.

Consider for instance a company that has fallen on hard times and a part of its business is no longer viable. In order to close down this part of the business, it may have to make staff redundant, and terminate leases and contracts. It may also have to remediate property.

Even if it was solvent before considering restructure, it could well become insolvent as it attempts a restructure. 

Why is that? 

Firstly, cash flow is the lifeblood of any business and cash is required when considering going down the path of restructuring a business.  Consequently, companies are often caught short of cash when trying to restructure and so are quick to discount it as a possible option.

There are a host of liabilities that arise which are not on the balance sheet and certainly become a cash flow drain for a company that was already in financial trouble, such as:

  • if any staff are being made redundant the company must fund the cash for redundancy payments (not accrued under accounting practices)
  • paying employees in lieu of notice (not accrued under accounting practices)
  • long service leave (when applicable and only accrued after 10 years’ service)
  • holiday pay
  • outstanding wages and
  • under some employment contracts, unused personal leave (not accrued under accounting practices).

Our accounting standards do not provide for the accrual of some of these liabilities, so there are no provisions on the balance sheet to tap into.

On top of this, the company needs to account for GST and pay it to the ATO often well in advance of its receiving this money in the ordinary course of business.  As debtor collection days increase, the burden of pre-paying GST on debtors not yet collected becomes onerous.   More so, if the debtor does not pay at all.

As can be seen, companies faced with the need to restructure may not be able to consider it due to their cash flow situation.  The reason is that often by the time a company is in a position where they need to take drastic action, it is most likely that they do not have sufficient funds to do so.  This is where both accounting and trading issues could converge to deny the company any chance of survival.

What is the solution?

Obtaining finance and having a well thought out plan are highly effective ways of injecting the necessary cash into the business for implementing turnaround strategies, giving it every chance of becoming successful and profitable, as well as increasing its resilience in the future.

The company can leverage its assets through:

  1. Debtors – through factoring agreements – where a business sells its invoices to a debt factoring lender at a discount.  As well as improving cash flow to meet its cash needs, it also frees up the business owner’s time to manage the business.  This allows the company to take advantage of opportunities that could provide business growth and expansion, that were not there before.
  2. Plant and Equipment – through secured loans – for businesses that are unable to prove their income or do not qualify for traditional banking methods, using their major plant and equipment may enable business owners to obtain cash flow finance using these assets to secure against.  Many business owners who do not qualify through the traditional methods may not be aware that business finance like this exists.

The above options are difficult, but not impossible if the business is viable. 

How to go about it?

To determine whether a restructure is possible, the business owner needs to conduct a detailed cash flow analysis.

dVT Group has assisted many companies to develop a “three-way” cash flow, which has proved to be the best robust cash flow tool for their business.

We can also help with recommendations to help through the restructuring process, which may include strategies such as changes to the management team, changing the company offering, entering a different market etc.  

Food for thought: 

If we take a step back and dare to be a little controversial, we ask … what if instead of the Federal Government offering the restructuring legislation (which commenced in 2021), they provide restructuring loans to help SMEs survive? These loans could have super priority and be signed off by a restructuring expert to validate that the plan has merit.

This would prove to be more effective and easier to administer than the convoluted and expensive legislative measures, such as Small Business Restructuring legislation (SBR).

The SBR legislation has not been a huge success with only a handful of companies taking it up.  This is primarily due to the requirements of this legislation to have:

a)    all tax returns are up to date and

b)    employee entitlements due being fully paid.

It costs money to have an accountant complete these and often when cash flow issues arise, it is very common that employee entitlements have not been paid.

Further, an SME needs to find the money to pay an SBR expert and the funds to complete restructuring.

If we want to be further controversial, the ATO funds most SMEs anyway (inadvertently by way of non-payment of taxes) which makes them almost always one of the biggest creditors impacted.  If an SME could be restructured and they pay back its creditors, the ATO (and therefore the government) would be a beneficiary as would society generally.

In summary

Whilst it’s difficult, it is possible to fund a successful business restructure if the business is viable. 

It is also a good idea for businesses to be proactive and have backup plans to pre-empt certain situations ensuring the business remains profitable and survives.

We also need to be aware of alternative paths to assist small businesses.  A sledgehammer approach is not always the answer!

Ultimately, if more businesses survive, this results in more people being employed and more taxes being paid.  This is a better result than having a company in a position where they are trying to find the money to pay for a small business restructuring expert, as well as the other costs of restructuring mentioned above.

Should you wish to conduct a cash flow analysis or discuss restructuring options, please contact Riad Tayeh on 02 9633 3333 or mail@dvtgroup.com.au.

dVT Group is a business advisory firm that specialises in business strategy, turnaround, forensic investigations, and insolvency (both corporate and personal).