7 Things Directors Should Consider When Times Get Tough (2019 Update)
Running a business often isn't easy. Here's some things Directors should keep in mind when things aren't going as well as planned.
Running a business can no doubt be stressful at the best of times, but this can be overwhelming if your business isn’t doing as well as you’d hoped. In this article, we’ll outline some things Directors should be thinking about when the business enters troubled waters.
1. Now’s the time to strategise
Having a strategy for your business is always important, but it’s crucial that Directors regroup when things take a turn for the worse. This will often mean straying from your original strategy – but adaptability is a must when it comes to the business world.
If you don’t have a clear plan in place, it can be easy to get caught up in the daily stresses of trying to keep your business going. At this time, you should ask yourself:
- What the realistic prospects are of turning things around
- Your ambitions for the business
- Whether you’re ready to bow out
- Whether the financial status of the business is redeemable. If it’s insolvent, you may have to appoint an administrator.
Your answers to these questions will help you plan how to move forward.
2. Accurate financial information is a must
Arguably, the most important task you’ll have before deciding how to proceed with your business is assessing your finances. Assessing your financial information will tell you why the business isn’t performing well. Here are three simple ways you can ensure your financial information is reliable:
- Draw up an annual budget and cash flow forecast. As the year goes on, compare your forecast with your current financial position
- Ensure you know what your product/service costs to produce
- Correctly value your assets
When a business is failing SME Directors might be tempted to get ‘creative’ with accounting. Not only can this type of activity put businesses in a much worse place than before, it’s also illegal. This type of activity can include:
- Delaying producing your financial statements
- Continuing to pay dividends through debt
- Valuing your business’s assets at inflated figures
- Paying debts out of your own pocket
- Valuing stock at inflated prices
3. The legal meaning of insolvency
A company is insolvent if it is unable to pay all of its debts when they become due and payable. Another important thing to bear in mind is that under section 588G of the Corporations Act 2001 (Cth) it’s illegal to incur new debts for your company whilst it’s insolvent. If this occurs, you may be personally liable for the debt.
4. The causes of insolvency
Many different things can cause insolvency. However, the most common cause is poor management. SME Directors can take steps to avoid insolvency by:
- Seeking and taking financial advice when it’s needed. Make sure you hire experts and understand the mechanics behind the company’s financial decisions.
- Staying open-minded and focusing on all areas of the business, rather than just one.
- Not overtrading or being over-ambitious in your goals.
- Taking risks only when the business can afford it.
5. Different ways of rescuing the company from insolvency
Administration, liquidation and receivership are all ways to rescue or revive insolvent companies that are worth preserving. If a business goes into administration the business will carry on, however, it will be operated by the administrator appointed voluntarily by the directors. During this time the administrator will consider options to keep the business open, such as recapitalising or selling the business.
Liquidation is where a business’s assets are sold off in order to for it to be closed. Liquidation may, as with administration, be entered into voluntarily or involuntarily. This forms part of the process of ‘winding up’ a company, which means that it will cease to operate.
Receivership is where a receiver is appointed to take control of your business’s assets and sell them to manage debts.
6. Actions by liquidators against SME directors
As we’ve mentioned, liquidators can make a claim against directors of a company if they incurred debts whilst the company was insolvent.
Creditors’ informal leniency will not necessarily affect the debt’s due date. The defences available to directors against insolvent trading claims are that there were reasonable grounds to expect that the company was solvent and would remain solvent. Directors should also ensure the company financials are up-to-date because a Court will presume a company to be insolvent if it fails to retain books and records.
7. Directors can be liable for unpaid Super
We all know that it’s illegal not to pay employees their minimum superannuation guarantees. However, Directors can be held personally liable for this if they don’t pay and report superannuation guarantees or PAYG within three months of their due date.
If Director does not comply with these requirements, then they may be issued a Director Penalty Notice (DPN). Further, Directors and their associates will not be able to access PAYG credit in their own tax returns where the company hasn’t paid.
Jackie is the Content Manager at Lawpath and manages the content team. She has a Law/Arts (Politics) degree from Macquarie University and is an admitted solicitor in the Supreme Court of NSW. She's interested in how technology can help shape the future legal landscape.