Ok, so you have gone to the effort of setting up or purchasing a business. You’ve sorted out the logo and the marketing and have now started to get a (hopefully steady) stream of income through the door. What happens next? The business just keeps trotting along that way, year after year, perhaps somewhat expanding until it’s time to sell or retire?
In the world of volatility, uncertainty, complexity and ambiguity in which we live, the factors faced by business owners are wide and varied. In many instances, the demise of a business is due to matters beyond the proprietor’s control. However, there are processes that can be put in place to: –
- Identify issues early;
- Formulate a strategic approach; and
- Try to travel through the turbulent time and survive the storm.
Below I have listed 10 tips available to business owners to assist in preparing for the unexpected struggles that they may face.
- Be comfortable with your business structure
- Keep the accounts separate
- Learn what the numbers mean (or engage someone who does) and review them regularly
- Understand your responsibilities
- Live within your means
- Pay your tax– or at least submit your lodgements
- Don’t ignore the legal letters/open the mail
- Get good advice
- If it sounds too good to be true it probably is
- Understand your options
In the main, the above list addresses the items as they would arise in a business’ life-cycle.
Tips 1-3 Relate to the early days of the business. 4-6 concern ongoing business life and 7-10 refer to the tough times.
TIP 1: BE COMFORTABLE WITH YOUR BUSINESS STRUCTURE
Many business owners start a business without fully considering how best to structure same. Whilst it might be easily dismissed as “something we’ll deal with later” and a “waste of money” – it is in business structuring where the old adage “prevention is better than cure” is truly relevant.
Whilst there are numerous ways to structure a business (sole-trader, company, trust etc) it is imperative that the person running the business understands fully and is appreciative of the risks involved in the different structures. Frequently I have seen businesses with adequate business structures lose their protection because the business owner hasn’t fully understood the structure under which it should be run. If you are going to spend the money to set up the structure, make sure you understand how best to benefit from it.
- Put all agreements with business partners, investors etc in writing so everyone is clear on how things will work and you can refer to same in the event of dispute.
- Understand who is ultimately responsible for the risk in your business – who is paying the bills?
TIP 2: KEEP THE ACCOUNTS SEPARATE
Notwithstanding how the company is structured, it is imperative that the business has its own bank account/s that only deal with funds flowing in and out for business purposes and that each transaction is recorded fully in the accounting system for the business. Especially in smaller businesses it can appear easy at the time to pay for personal items (such as school fees) from the business account and leave it up to the accountant to “sort out” the entries later. However so that you are always fully aware of the activities of the business, the cashflow trends and any potential red flags, all accounts should be kept separate.
TIP 3: LEARN WHAT THE NUMBERS MEAN (OR ENGAGE SOMEONE WHO ALREADY DOES) AND REVIEW THEM REGULARLY
There may be some areas of life in which ignorance is bliss, however business is definitely not one of them. Company directors are duty bound to prevent the company incurring debts that may be unable to be repaid and it is not a defence that they simply were not aware that the Company may have been insolvent. Further, regular review of accounting reports can outline trends, opportunities and challenges facing a business and allow for ongoing improvement and development. Accordingly, it is imperative that businesses operate an appropriate accounting system that can provide meaningful reports easily to inform of the business’ progress. Understandably, some people in business are good with their chosen niche but may not be at all interested in the accounting side of things. In these instances, the engaging of a book-keeper and/or accountant to provide not only the reports but also an ongoing analysis of same is a must.
TIP 4: UNDERSTAND YOUR RESPONSIBILITIES
In Tip 3 we mentioned the duty of a director not to trade an insolvent company. This is but one of many regulations that may apply to a business owner/company director and it is important that they are known and understood. From taxation issues (both state and commonwealth), to environmental obligations, human resources issues and workplace health and safety, all too often it is not that business owners “flout” the rules – it’s that they aren’t aware of the rules in the first place. Do the research, ask the questions and obtain advice from qualified professionals to assist along the way. The last thing you want is to have a great business let down by failure to comply with an administrative duty (or worse).
TIP 5: LIVE WITHIN YOUR MEANS
It may seem like a given that businesses (or people for that fact) should not spend (or commit) more than their budget allows, however it is astounding how often this rule is broken. Firstly, to be able to keep to this rule, there has to be a budget, and this goes back to Tip 3. Contrary to popular belief, the cash in the bank is not the profit of the business and close regard must be held not only to liabilities and other ongoing expenses and payments, but also payroll obligations (including Superannuation, PAYG tax and provisions for leave), provisions for taxation obligations, and contingency amounts should all be included. This also needs to take into account any seasonal increases and decreases in cashflow. The budget and cashflow forecast should be updated regularly and adjusted where appropriate for necessary and discretionary spend. It is at this point that educated decisions can be made with respect of investments available to the business.
TIP 6: PAY YOUR TAX– OR AT LEAST SUBMIT YOUR LODGEMENTS, KNOW WHAT YOU HAVE TO PAY AND PROVIDE FOR IT
If time and effort has been invested in structuring a business, it is important that the integrity of same isn’t compromised. For example, a business run through a company should have the protection of the corporate veil. There are instances, however, where the veil can be lifted, and the directors of the entity can be personally liable for a company’s debts. This can occur when certain taxation lodgements are not filed. Failure to lodge and provide for taxation obligations can also lead to the company trading whilst insolvent as it could be deemed that notwithstanding that the director didn’t know that the company was incurring debts it could not pay, a reasonable person in the same position (ie someone who knew what the company’s tax position was) would have known about the solvency issues, and that may be enough.
TIP 7: DON’T IGNORE THE LEGAL LETTERS – OPEN THE MAIL
Sometimes, despite the best of efforts, a business can be caught in the unfortunate situation, wherein it cannot pay its debts and may be subject to stress-inducing contact from creditors and other stakeholders. At these times, it can be tempting to plant one’s head firmly in the sand and continue “business as usual”. However, as we have spelled out above, at least in business, ignorance is not bliss. This is not a time to tune out but a time to assess the situation with a level head and consult the experts (see below) on the options available. There are always options, and what seems like a terrible option now, may seem like a dream in 6 months’ time when circumstances get worse. In order to understand the options, however, you must fully understand the situation, and this can only be done with all of the available information.
Further, there may be options available of which you are not yet aware. Creditors may offer payment plans or hardship options which are only discovered after you communicate with them.
Open the mail. If there are demands you cannot pay, seek professional advice. If there are legal letters, seek professional advice. Act promptly and swiftly before it is too late.
TIP 8: GET GOOD ADVICE
First, it must be said that “Good Advice” does not always = pleasant to receive. Generally, if something seems too good to be true, it is (see below). Good advice means, information and options that are fully considered and provide a way forward in the current situation. It makes sense that to get good advice, you need to have a good advisor. However, bear in mind that not all good advisors are good for everything. Think about it, you wouldn’t go to the GP for Brain Surgery, so similarly you shouldn’t go to your bookkeeper for specialist tax advice, or to your accountant for legal advice. Every business should have an accountant and that accountant should know the fundamental details of the business. The accountant can be the first point of call, for any business-related matter, however in many cases they shouldn’t be the last.
The best accountants have a network of specialists working around them, not necessarily in the same firm or under the same roof, but people they can call when they have identified issues that need further investigation. It is these “specialists” that can then provide the most relevant advice on how to best deal with a situation. However, to do this, they will also need all of the information (see above).
The right advisor with the right information can provide the right alternatives.
TIP 9: IF IT SOUNDS TOO GOOD TO BE TRUE, IT PROBABLY IS
Following on from above, it is unlikely that “Good Advice” will be received at a back yard BBQ from someone whose mate’s sister’s husband was “having trouble with the tax office” so he just “did this” and not only “got off scott free” they also “got to keep the business, their house and the boat”… There is a whole industry currently promising the world to businesses in financial distress but the ramifications of dealing with un- or under-qualified people are significant. Without understanding, this can lead to fraud and illegal actions on behalf of the director or company which can be punishable at a later time. Further, these “consultants” are not inexpensive, and in the very process being taken by a director to protect their family home, they can be putting it (and other assets) at more risk by signing agreements with charging clauses, securing the payments of these “consultants costs” against same.
There are processes in place for dealing with individuals and companies in financial distress. There are qualified experts to assist during these hard times. It is imperative that you fully understand the consequences before being pushed into a direction you are not happy to take, or worse still, do not understand.
TIP 10: UNDERSTAND YOUR OPTIONS
As discussed above, at any point in time there are options available. However, the number and attractiveness of these options can vary greatly and often diminish with the passing of time. Most decisions in business require careful consideration and analysis, taking into account what it means for the business and those operating it not only now, but also into the future. It is imperative that business-people are aware of the impact of their decisions and ask as many questions as necessary to identify whether a particular option is right for them. Things to be considered could include: –
- Am I comfortable with the level of risk that this option assumes?
- Do I know the true cost of the option?
- What does this option mean for the business?
- What does this option mean for me personally?
- What does this option mean for the employees?
- Does this option comply with my responsibility as a director?
- What does this option mean for me in the short, medium and long term?
- What do my trusted advisors tell me about this option?
- Are there any other options I am yet to consider?
Each of the above tips are merely a snapshot of the issues addressed. A separate article could be written about each one.
People don’t go into business to lose money. When things go pear-shaped it pays for those involved to understand that they aren’t alone. The worst thing to do is to ignore what is happening. Rather, seek assistance from those who deal with these matters every day and can give honest and relevant advice to assist.
This article is intended to provide general information only in summary format on relevant issues. It does not constitute legal or financial advice and should not be relied on as such.