Effective strategies for reducing company debt

An unfortunate consequence of pandemic era support for small businesses is the high level of ATO debt that they are now struggling to pay. With the ATO increasing collection efforts, business owners need strategies to reduce company debt.

Changing debt recovery landscape

The ATO has been ramping up the rhetoric over unpaid debts from small businesses since late last year with Australian Taxation Commissioner, Chris Jordon commenting,

“We are resetting our debt focus to collect what is owed. This includes non or late payment across all business segments, including small businesses. I am unapologetic about this. The ATO is not a bank offering cheap loans and a cashflow buffer. Paying tax isn’t optional”.

More than two-thirds of the ATO’s $50 billion in collectible debt is currently owed by small businesses and many would have started receiving red warning notices and at worst, director penalty notices.

Now is not the time to ignore such notices, but to take professional advice on how to reduce company debts.

Assessing your financial situation

The first step in reducing debt is understanding the full scope of your financial situation. This means ensuring your bookkeeping and accounts are accurate and up to date so that you can produce a set of financial report that give a clear picture of the financial health of the business.

It is important to ensure that all loans are properly recorded on the balance sheet, split between those repayable on demand and those with longer payment periods. Remember to include vehicle finance leases and company credit cards, as well as bank loans and amounts owed to the ATO and superannuation payments.

The next step is to update your cash flow forecast (or build one if you don’t already have one) for the latest actual information so that you have the most accurate picture of how much cash is available for debt repayment each month.

If at this stage your cash flow forecast suggests that you do not have sufficient cash flow, or available funding, to pay your current liabilities as and when they fall due, you should consider speaking to a liquidator about the best course of action.

Debt reduction strategies

Prioritise your debts

Not all debts are created. Prioritising which debts to pay off first can save money on interest and reduce the risk of legal challenges. Consider which debts have the highest interest rates and pay these off first. However, you will also need to consider which creditors are most aggressive and likely to seek legal action to recover amounts due. The ATO has a very aggressive interest and penalty regime which can easily snowball the cost of amounts owed.

Negotiate a payment plan

Many creditors are willing to work with businesses to modify payment terms. Negotiation can result in lower interest rates, extended payment periods, or reduced balances. Approaching creditors, particularly the ATO, with a clear plan can increase the chances of success. Ignoring the problem until the last moment makes the chances of the ATO accepting a payment plan all the more difficult.

Increase revenue

Depending on the nature of your business, it may be possible to increase cash inflows to pay down debt by running a promotional sale to move slow-moving items or better utilise under used service delivery team members.

Reduce the cost base

Reducing expenses frees up cash that can be directed towards debt repayment. Look for those service contracts that are coming to renewal and seek alternative quotes to make sure you are getting a commercial outcome. Reduce costs of non-essential expenses such as travel costs, unused subscriptions or excessive utility costs. Finally, consider whether staff layoffs are needed, taking care to understand your employment obligations and any redundancy payments.

Debt restructuring

From 1 January 2021, the government made changes to the insolvency framework and introduced a simplified debt restructuring process for eligible small businesses. The process allows financially distressed small businesses to access a single, streamlined process to restructure their debts, whilst allowing the owners to remain in control of their business. To be eligible, a business must be:

1.      Incorporated under the Corporations Act

2.      Have total liabilities which do not exceed $1m at the date of appointment

3.      Has completed and lodged all BAS and income tax returns

4.      Has paid all outstanding employee entitlements, including superannuation

5.      Willing to resolve that the company is insolvent or likely to become insolvent and that a small business restructuring practitioner should be appointed.

More details on this relatively unknown option for small business owners to reduce debt can be found here - Simplified Debt Restructuring Factsheet.

How an outsourced CFO can help

When a business is struggling financially, it may be tempting to think that you cannot afford outside help and cost to provide support and find solutions. However, a better question should be, can you really afford not to?

Assessing your current financial situation and devising debt reduction strategies is complex work, and few business owners have the time or the financial skills to tackle this. These tasks should be outsourced to an expert accountant if you do not have such a role internally. An outsourced CFO is the perfect solution.

CFO is short for Chief Financial Officer, and this is the most senior and experienced finance professional in most big businesses. A CFO provides high quality finance, accounting, commercial and operational advice to a business. Not surprisingly, a CFO comes with a hefty salary and cost to the business, and so it is usually only larger businesses that hire a full-time CFO.

Smaller businesses, particularly those that are looking to grow and expand services, also need the advice and services provided by a CFO but not on a full-time basis. This is where an outsourced option comes into play. An outsourced CFO could work on a one-off project or on a retainer, for a much smaller number of hours per month. This means the cost is substantially lower than hiring a full-time resource.

An outsourced CFO would be able to analyse your company financial situation and advise on strategies for reducing company debt. They would also be able to advise on when is the appropriate time to talk to a liquidator.

An equally opportune time to consider appointing an outsourced CFO would be after completing a simplified debt restructure process. At this point, the company has a much-improved debt position and a ‘new lease of life’. This would be the perfect time to embed better financial reporting and cash flow forecasting into the business to ensure that it does not make the same mistakes again.

Why should I choose GearChange Business Advisory?

At GearChange Business Advisory, our passion is supporting business owners to turn their dreams and goals into an actionable business plan that gives you the best chance of success, and the future you deserve for you and your family.

Our business is led by Steven Nicholson who has over 30 years of experience helping small and growing businesses achieve their business goals by advising and supporting business owners with commercial advice and insightful financial information.

Steven’s extensive experience has taught him two key things that ensure a successful outsourced CFO engagement:

1.      All businesses are different. Rather than a one-size-fits-all solution, Steven will always tailor the services to meet the specific requirements of each client, ensuring that their financial strategies align with their business objectives.

2.      Build a trusting relationship with the business owner. Steven’s relaxed and honest communication style allows him to lower barriers quickly and show the value he can add as a trusted business advisor. This is critical to understanding the true worries and drivers of a business owner and ensuring that these are front of mind in any solutions provided.

What should I do next?

By outsourcing profit margin analysis to an expert in the field, you can focus on what you do best – running and growing your business.

Get in touch with GearChange Business Advisory for a no obligation chat to see if we can help your business move up through the gears.

Initial free CFO consultation