Five golden rules when creating a cash flow/solvency plan

BY Nick Hitchens
10 March 2021

Discussion of solvency and cash flow issues can often be considered sensitive, risky and often seen as ‘doing more harm than good’. Nick Hitchens, Principal, Hitch Advisory, couldn’t disagree more.

In my view, the sooner businesses discuss their solvency and cash flow plans with internal stakeholders and professional advisors the sooner issues can be identified, particularly in times of distress and pressure.

There are a number of objective factors, beyond the balance sheet, that will be looked at when determining the financial health (i.e. solvency) of a business, including:

  • Financial comfort provided by your financiers
  • Continuing losses
  • Liquidity ratios below 1
  • Overdue creditors including State and Commonwealth taxes
  • Cash on delivery arrangements
  • Payment arrangements with creditors
  • Demands and litigation
  • Inability to produce and maintain financial records

As Covid-19 stimulus and landlord relief is tapered off by April 2021, businesses of all shapes and sizes should have comprehensive cash flow and solvency plans. Obviously, the complexity will depend on the size of the business.

Small to medium business directors need to be particularly aware of the overlap between business and personal liabilities, particularly in relation to personal guarantees given to landlords and creditors, as well as PAYG and superannuation obligations. These can result in personal bankruptcy if not proactively managed.

If your cash flow/solvency plan is not positive, then be proactive and seek professional advice as to your commercial and legal options. Insolvency law is a tool in developed economies, like ours, which acknowledges that sometimes businesses fail and sometimes creditors need to accept the least bad scenario.

Insolvency does not always mean a business closes and often does not mean a director is criminally charged. These misconceptions often dissuade directors, particularly in SMEs, taking advice before it’s too late.

We have 5 ‘Golden Rules’ for Australian businesses considering their cash flow/solvency plan in 2021 and beyond Covid-19:

1. Legacy debt kills – blindly trading on is often not the best option

2. Not all insolvencies are fault based or criminal

3. Not all corporate restructures are ‘phoenixes’

4. Time equals options – be proactive as cash flow timing can make or break a business

5. The most resilient businesses diversify – Fast!

If you would like to understand your options in respect to cash flow and solvency issues, ARA members are reminded they have access to a free 30 minute consultation with the ARA’s strategic legal partner Hitch Advisory.

Please feel free to contact me, Nick Hitchens, on ara@hitchadvisory.com.

Hitch Advisory can be used to discuss this issue on a private and confidential basis subject to legal professional privilege.

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ABOUT THE AUTHOR

Nick Hitchens

Nick Hitchens is a key advisor to a range of Australian and International businesses. He has assisted hundreds of business owners seeking investment, divestment or acquisition with a transaction history totalling $500m+. Nick has a breadth of experience in advising distressed businesses and insolvency practitioners. He has acted on many distressed merger and acquisition transactions.

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