Cash flow squeeze and ATO crackdown pushing insolvency to record highs

Peter Marsden | Director and National Head of Restructuring & Recovery | RSM Australia

A resumption of normal interest rates, and more stringent collection efforts by the ATO will leave a record number of companies, mostly SMEs with unserviceable higher-than-average debt levels, liquidation ‘timebombs’ waiting to explode: This is the major finding from a newly released national survey of 1,500- plus Australian business owners, consultants, and directors.

Conducted by national accounting firm RSM Australia to better understand Australia’s ‘time bomb’ phenomenon, just over half of the survey respondents claim harsher collection actions by the ATO, directly contributed to a 31.9 per cent increase in official liquidations recorded by ASIC
last year.

With around two thirds of survey respondents (64.8 per cent) noticing an increase in ‘walking dead’ - aka Zombie companies trading with varying degrees of insolvency, artificially propped up by historically low interest rates, and a hitherto benevolent ATO approach to tax recovery. RSM Australia expects wind-up notices to increase over the next 18-24 months. While all industries will be affected over the next two years, research suggests industries directly impacted by the ‘tax debt issue’ are financial and insurance services, construction, professional/scientific services, agriculture, forestry and fishing.

Given that they lack the capital needed to grow, ‘walking dead’ companies with insufficient profit to service debt are increasingly vulnerable to higher interest rates, and an ATO that’s taking greater action to recover its money.

Cash flow outweighs ATO crackdown

Survey respondents (23 per cent) thought insufficient cash flow exposed companies to a much greater risk of insolvency than any policy tightening by the ATO (11 per cent); while forcing companies to pay GST in advance of receipt, was seen as accentuating cash flow problems with long-term debtors. But instead of blaming the ATO for wanting to recover outstanding tax, respondents also recognised that it’s incumbent on business owners to take active steps – like improving budgeting and cash flow management skills - to minimise insolvency risk.

Insufficient cash flow is often symptomatic of more complex problems, which emanate from falling profit margins or failure to adequately plan for growth. This is reflected in almost half of all respondents identifying poor planning and cash flow systems as the driver of increasing company liquidations.

Insufficient cash flow aside, over one in five respondents also suggested inadequate financial systems for making informed planning decisions was the second single biggest contributor to insolvency risk. Respondents suggested online accounting systems would help the ‘walking dead’ monitor profitability in real time, and not just once problems arise.

Alarm bells

Almost 40 per cent of respondents identified cash flow shortage as the single biggest tell-tale sign of ‘walking dead’ status. Other indicators of struggling companies trying to address cash flow warning signals is the number of respondents witnessing an increase in late or altered super and tax payments (16 per cent), rising extended credit terms & overdrafts (14 per cent), redundancies and higher staff turnover (12.7 per cent).

These numbers suggest the insolvency issue is considerably bigger than those companies being wound-up annually would suggest, with expectant tightening of banking regulations and higher wages, adding to the number of companies heading towards ‘walking dead’ territory.

A common precursor to trouble is a rising number of days outstanding for payments, and may be a sign that if they’re in trouble, late payments might get worse. Similarly, GST, PAYG, and super payments are not monies that ever belonged to a company, and failure to meet these obligations is only delaying the inevitable.

Reverse exposure to insolvency risk

By refocusing on what they can control, utilising up-to-date information and accounting systems, preparing business plans, budgets, and cash flow forecasts, SMEs are reminded they can reverse their exposure to insolvency.

Given that their underlying business might be quite profitable, there are numerous steps within the SME’s control - including good debtor systems, early discussions with bankers to better anticipate future debt provisions or even going into voluntary administration to restructure the business– to help get them back on track.

Going well beyond repaying creditors, restructuring arrangements can also make SMEs profitable again. While companies wait far too long to get help, seeking proper advice early enough can not only prevent them from going bust – typically by defaulting on debt provisions - it can also restore shareholder value.

Peter Marsden is Director and National Head of Restructuring & Recovery, RSM Australia.

RSM is a full service national accounting and advisory firm delivering expert corporate financial and advisory accounting services to clients across diverse industry sectors.

Its unique one-firm structure means clients can more readily connect to its extensive national and international networks, expertise and industry experience.

Nationally RSM has 29 offices, combined with over 90 years’ experience. Its network spans across 110 countries and comprises 730 offices.

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