All businesses, even great ones, face challenges. Despite your best efforts as a director to maintain your company’s prosperity, some challenges can be too much to overcome on your own.

In Australia, 7,464 companies entered liquidation or administration in the 2016/2017 financial year, according to the Australian Securities and Investments Commission (ASIC). Financial difficulties are a reality for many – so what can you do when they strike?

Acting fast is the best approach. Diagnosing problems, increasing monitoring and implementing solutions early can avoid issues developing into inevitable closure.

Here are four ways to address financial issues head-on:

Restructuring

Your business may have strong operations, but its finance structure (debt and equity) may be suffocating cash flow or depleting profits. When loans reach maturity or your business outgrows its existing finance arrangements, you may face cash-flow or solvency issues. To fill gaps, it can be tempting to use credit cards or let Australian Tax Office (ATO) debts grow, but high interest and ATO enforcement can create even bigger problems.

Speaking to your existing bank is the first step. If they aren’t able to meet your financing needs, a business finance broker can help navigate the types of funding available and identify appropriate facilities. Getting the right capital structure can dramatically change your business and will mean that you as a director can get on with what you do best – running your business.

Turnaround

Turnaround is a broad term that involves steering a viable business through its challenges towards improved cash flow and profitability. A turnaround can mean:

1. stabilising the business and firming up short-term cash flow
2. taking a closer look at strategic, financial and operational aspects to cut costs or improve profitability
3. selling or divesting part or all of the business

A turnaround doesn’t need to be complex and is an opportunity to build a better business, often with help from your accountant or a turnaround professional. You may already know what’s going wrong but are struggling to make the necessary changes on your own.

An ATO payment arrangement or obtaining additional finance are often essential to stabilise your business, but they’re not solutions in themselves. Putting money into a troubled business can be like pouring water into a leaky bucket, so the underlying causes of problems need to be fixed at the same time.

If you’re a director undertaking a turnaround you also need to be aware of your duties to creditors and potential personal exposure for insolvent trading. The good news is that from January 2018, new ‘safe harbour’ laws will provide directors with protection from insolvent trading claims where they’re undertaking a genuine turnaround.

Voluntary Administration

If you can’t pay your business’s debts or are under pressure from creditors, appointing an administrator may be your only option. Administration aims to save a business or, if this is not possible, to provide a better return to creditors than liquidation.

While under administration, creditors are prevented from taking further legal action, giving your company breathing space to formulate a survival plan.

If your company is still trading:

• you can put forward a proposal to creditors that will allow your business to continue trading and bring its debts down to an affordable level. This proposal is called a deed of company arrangement (DOCA).

If your company is no longer trading (following the sale or closure of your business, for example) but can’t pay all of its debts:

• a DOCA may provide an improved way to wind down your company’s affairs. While a liquidation is often used to close down a business, a DOCA can avoid the associated risks and costs of legal claims which a liquidator may make against directors, related parties or other creditors. In this case a DOCA is a settlement offer to provide a return to creditors that is better than if you were to go into liquidation.

Liquidation

Liquidation is often considered a last resort when a business hits significant financial difficulties.

If your business is not viable or has ceased, has no realistic prospect of proposing an achievable DOCA, and company debts remain unpaid, a liquidator may be appointed. This can be involuntary (by a creditor through the court) or voluntary (by the shareholders of your company).

Liquidation will result in the closure of your business and termination of employees. The liquidator will:

• collect and sell available assets
• investigate your company’s affairs and whether any recovery claims exist (generally for preferences, uncommercial transactions, insolvent trading and breaches of directors’ duties)
• provide a report to ASIC on your conduct as a director
• distribute any surplus funds to creditors.

About the author

Jarvis Archer, is a small-to-medium business turnaround and insolvency specialist. His qualifications include Certified Turnaround Analyst, Liquidator and Chartered Accountant.  He brings over 15 years’ experience helping businesses and directors overcome financial difficulties. He is a senior manager at turnaround firm Cactus Consulting and associated insolvency firm Pearce & Heers.