As a CFO, effectively managing costs and cash flow is central to leading your organisation through financial fluctuations. With rising debt costs and unpredictable market dynamics, ensuring liquidity and stability requires more than just balancing the books—it demands foresight, agility and a proactive approach to financial controls.
As the ATO adopts a stricter stance on payment plans and lodgement extensions, delaying action not only reduces recovery options but also heightens risks such as insolvent trading claims and personal liability for directors.
Below, we delve into the key indicators of business distress and how to evaluate whether your company may be at risk of financial distress before offering some actionable strategies to drive financial stability.
Key financial indicators for early distress
Even minor cash flow disruptions can quickly escalate into significant challenges. Delayed receivables, growing debt or unforeseen market shocks can erode liquidity and jeopardise your organisation’s resilience.
By tightening controls and anticipating potential risks, you can safeguard business continuity and position your organisation for sustainable growth.
Understanding the early signs of financial distress is critical for taking timely action:
1. Declining revenues
Persistent revenue drops could signal shifts in market demand or competitive weaknesses. Early intervention is key to recalibrating strategies and protecting market share.
2. Shrinking profit margins
Reduced margins may point to rising input costs, pricing pressures or operational inefficiencies. Dive deep into cost structures to uncover opportunities for improvement.
3. Increasing debt levels
Monitor debt closely, especially if it begins outpacing industry benchmarks. Rising interest costs can strain cash flow and restrict financial flexibility.
4. Poor cashflow
Negative operational cash flow can make it difficult to meet short-term obligations, increasing reliance on external financing.
5. Liquidity challenges
Declining current or quick ratios signal a growing risk of being unable to cover short-term liabilities, which could erode stakeholder confidence.
6. Missed debt obligations
Late payments, breached covenants or restructuring requests from lenders highlight significant financial strain.
To maintain liquidity and mitigate risk, CFOs must look beyond traditional cost-cutting methods. Your business can be improved through gains in operational efficiencies and improving working capital management. Here are actionable strategies to drive financial stability:
Operational efficiency
1. Automating processes
Leverage technology to automate repetitive and time-consuming tasks such as data entry, invoicing and payroll processing.
2. Streamlining supply chain management
Use advanced inventory management tools and real-time tracking systems to optimise your supply chain.
3. Standardising workflows
Develop clear and consistent procedures for key operations, ensuring reliability and efficiency.
4. Investing in employee training and upskilling
Equip your workforce with the skills to navigate modern technologies and changing market dynamics.
5. Adopting energy-efficient practices
Upgrade facilities and equipment to be more energy-efficient, aligning with sustainability goals while lowering costs.
Working Capital Management
1. Enhance forecasting
Use advanced modelling to create accurate and dynamic cash flow forecasts. Incorporate multiple scenarios to stress-test your plans against potential disruptions.
2. Understand the cash conversion cycle
Optimise the cash conversion cycle by reducing receivables collection periods and managing payables strategically.
3. Review of operating expenses
Regularly review and adjust operating expenses to align with current financial realities.
4. Strategic debt management
Evaluate debt structures regularly, aiming to renegotiate terms or refinance high-interest obligations when possible. Prioritise repayment strategies that balance liquidity preservation with reducing financial liabilities.
When financial strain persists: Restructuring options for CFOs
If financial challenges escalate, CFOs must be prepared to explore restructuring options to stabilise the organisation and protect stakeholder interests. Below is an overview of both informal and formal restructuring approaches.
Small Business Restructuring (SBR)
The purpose of Small Business Restructuring (SBR) is to give directors and their companies the opportunity to present a structured plan to creditors for repaying liabilities, either in full or in part, within a maximum period of three years. This process is overseen by a small business restructuring practitioner, who works closely with the directors to develop and implement the plan. SBR serves as a practical alternative to more formal insolvency options, such as liquidation or voluntary administration, offering a cost-effective solution that often results in better outcomes for all creditors compared to liquidation. Eligibility for SBR involve:
- Designed for SMEs with liabilities under $1 million
- No outstanding employee entitlements (i.e. superannuation)
- Submitted all outstanding lodgements to the ATO
- A director can only use the SBR regime once every seven years
Alternatives for larger distressed businesses or those that don’t meet the eligibility criteria for the SBR regime include a formal restructure through a Voluntary Administration or an informal restructure under Safe Harbour provisions.
Safe Harbour protection
For larger enterprises, Safe Harbour provisions offer essential protection for directors, shielding them from personal liability for insolvent trading while pursuing a plan likely to achieve a better outcome than immediate external administration. Eligibility for this requires ongoing assessments to ensure directors can justify their belief in the plan’s effectiveness.
By reducing personal liability risks, Safe Harbour provisions enable directors to focus on executing their turnaround strategy. Operating discreetly, it is not listed on the ASIC register and does not affect the credit score of a company or its directors. Key eligibility criteria include:
- Employee entitlements paid up to date, including superannuation liabilities
- Tax reporting up to date
- Appointed appropriately qualified safe harbour advisor
- Implementing a course of action that is reasonably likely to lead to a better outcome for the company/creditors
Understanding the indicators of financial distress will allow business owners and stakeholders to respond proactively to challenges. CFOs can position their organisations for success even in uncertain economic climates. Early action is crucial for reducing insolvency risks and fostering sustainable business growth.
If your business is experiencing signs of financial distress, please contact your local Willaim Buck Advisor to discuss your options and plan for the future.
