CASH FLOW MANAGEMENT DURING THE LOCKDOWN AND BEYOND
6 May 2020
Under separate cover we have already made you aware of what is effectively 6 month’s protection (effective 23.3.2020) from bankruptcy or company liquidation. To recap:
Temporary Higher Thresholds and More Time to Respond to Demands from Creditors
A creditor issuing a statutory demand on a company is a common way for a company to enter liquidation.
The Government is temporarily increasing the current minimum threshold for creditors issuing a statutory demand on a company under the Corporations Act 2001 from $2,000 to $20,000. This will apply for six months.
Not responding to a demand within the specified time creates a presumption that the company is insolvent. The statutory timeframe for a company to respond to a statutory demand has been extended temporarily from 21 days to six months. This will apply for six months. To assist individuals, the Government has made a number of changes to the personal insolvency system regulated by the Bankruptcy Act 1966. The threshold for the minimum amount of debt required for a creditor to initiate bankruptcy proceedings against a debtor has temporarily increased from its current level of $5,000 to $20,000. This applies for six months.
Failure to respond to a bankruptcy notice is the most common act of bankruptcy. The time a debtor has, to respond to a bankruptcy notice, has been temporarily increased from 21 days to six months. The extension will give a debtor more time to consider repayment arrangements before they could be forced into bankruptcy. This now applies for six months.
When a debtor declares an intention to enter voluntary bankruptcy by making a declaration of intention to present a debtor’s petition there is a period of protection when unsecured creditors cannot take further action to recover debts. This period has been temporarily extended from 21 days to six months. This gives debtors more time to consider the options that are best for them. This will apply for six months.
Creditors, many of whom are themselves small businesses, will still have the right to enforce debt against companies or individuals through the courts.
in similar fashion there is temporary relief (6 month) from directors’ personal liability for trading while insolvent. The government has stepped up to the plate with tax free cash flow boosts for employers of between $20,000 and $100,000 to eligible businesses based on their PAYG withholding obligations.
In addition, the JobKeeper Allowance will allow many struggling businesses to retain staff.
The following cash flow management techniques may be of some use in this crisis.
Manage Your Cash Flow
In these trying times, business owners need to stay on top of their cash flow by monitoring their cash flow statements monthly or even weekly to keep their eye on cash inflows and outflows.
1. Monitor your cash flow regularly.
Most small business online software packages make it simple to reconcile your accounts, generate reports and more. With your information secure in the cloud, you can stay on top of your cash flow wherever you are. The key is to have a system in place to regularly review your cashflow.
2. Get a business line of credit before you need one.
A business line of credit is a good insurance policy against cash flow problems. It may be possible to get a line of credit for a percentage of your accounts receivable or inventory if you use them as collateral.
3. Cut costs.
Focus on recurring monthly, quarterly or annual expenses. Establish whether you can cut back on utilities, rent or payroll. If you are incurring costs on services you’re not using or insurance you no longer need, then cut these. Consider renegotiating the terms of outstanding loans or leases.
4. Cash in on assets.
In the event you have equipment no longer in use or inventory that’s becoming obsolete then consider a sale to generate quick cash. Scrapping or waiting off obsolete equipment and/or stock will result in tax savings.
5. Stay on top of invoicing.
Promptly send invoices when the work’s completed or products are delivered—Establish the relevant person, job title and address to send your invoices to so they don’t get lost in a shuffle from department to department. If possible, develop a dialogue with the relevant person. Make sure your invoices are straightforward and concise, with key areas like due date, amount due, where to send payment and payment methods highlighted. Emailing invoices speeds up the process.
6. Lease equipment instead of buying it.
By leasing vehicles, computers and other business equipment, you get access to the latest features and avoid tying up cash—but you still get to expense the lease costs as a tax deduction.
7. Offer deals to speed up payments.
Consider offering your customers incentives, such as percentage off the total, for early payments, but ensure the trade-off is effective.
8. Don’t let travel slow your invoicing.
If you’re on the road use the free instant invoice creators by inputting your info into a template, then generating a PDF you can email to your customer.
9. Use mobile payment solutions.
If you sell products or provide services at customers’ homes or offices, get paid on the spot with mobile apps that use your smartphone or tablet to accept payment by credit and debit card.
10. Delay payments to your suppliers.
Unless there’s a worthwhile incentive for you to pay early, establish how late you can pay your suppliers without risking late fees or causing harm to your relationship. This retains cash in trying times.
11. Consider the use of business credit cards.
Look for cards with rewards such as points you can use toward travel or business purchases. In addition to providing a cushion for lean times, business credit cards also categorise your purchases, so it’s easier to track expenses.
12. Request deposits or partial payments on large orders or long-term contracts.
For example, a building contractor or a website developer might charge a 10 percent deposit upfront before beginning to draw up plans for the project, then charge half the remaining amount when work begins, and the balance upon completion. Charging this way, the company generates enough cash to finance the materials and pay the workers needed for the job.
Now more than ever, it is crucial you stay on top of your cashflow.
Manage Your Relationships
We acknowledge the challenges are unprecedented, and people are facing real stress. The temporary protection outlined above may not exist in 6 months. The power will shift back to creditors (people you owe money) in due course and their attitude to your business will in part be a function of how effectively you have communicated with them and how pleasant their dealings have been with you.
The enterprises most likely to succeed post lockdown will be those with a business plan which includes an effective credit policy. In tandem with this, business owners will need to have personal budgets for themselves. Make no mistake – insolvency practitioners are still busy in times of economic expansion and business owners need to ensure they are adequately capitalised and have strong cash flows before undertaking significant expansion.
Review Your Credit Management Policy
While not all the below may be relevant to your business, you may find some procedures you’ve overlooked.
Here are our suggestions:
1. Establish terms of trade
These need to be documented and agreed with your customers prior to supply.
These terms need to cover where applicable:
- The issue of price
- Terms of payment
- Warranties and conditions of purchase
- Limitation of liability
- Interest/administration fees
- Costs recoverable
- Security for payments
- What constitutes “default”
- What constitutes termination of the agreement
In the event of a dispute, the terms of trade should be signed and dated by the customer to show their acknowledgment and agreement to those terms.
2. Undertake credit checks and use a credit application
Conducting an accurate overall assessment of customers to which you will be providing credit is crucial.
You should insist on and check trade references, then carefully assess the customer’s likelihood of being a relatively safe credit risk. In the event this has established, provide your customers with an Application for Credit document.
This form will include the customer’s basic details, such as:
- Full legal name of the entity
- Type of entity i.e. sole trader, partnership, company, trust, government authority
- Details of the legal owners of the business or company
- ABN or ACN if applicable
- Physical address/Place of business
- Postal address
- Relevant telephone numbers (for business and after hours)
- Email address
This enables the business to more effectively enforce the collection of outstanding payments if the customer were to go into default. Therefore, the more information gathered about the customer from this process, the greater chance of securing payment for supplies in the future.
It may also be necessary to obtain or confirm business or company information by conducting Australian Securities and Investments Commission (ASIC) searches.
The credit application form can also allow you to:
- Assess the customer’s ability to meet their financial obligations
- Undertake credit reports pursuant to thePrivacy Act 1988
- Disclose your terms of trade
3. Use personal guarantees and secure your debt
The incorporation of personal guarantees in a credit application may be effective to recovering a customer’s debt successfully.
Guarantees should also be required to produce evidence of their personal ability to pay, such as providing financials.
In addition to obtaining information on guarantees, it is also important to secure your debt with a properly drafted “Retention of Title” clause in the terms of trade and registration of your security interest on the Personal Property and Securities Register (PPSR).
A registration on the PPSR will provide added protection in proving and enforcing your security interest against the customer in the event of default of the terms of trade and the customer entering administration or insolvency. This may set your debt apart from other creditors and increase the likelihood of receiving payment.
4. Establish a system and enforcement Plan
Once you have completed a risk assessment of the customer, their ability to pay has been satisfied to the required extent and the terms of trade are finalised, it is important to establish an effective system to manage the payments.
By creating a system that consistently monitors invoicing, collection and follow up, a business is more likely to obtain regular repayments and sustain cash flow.
It is also essential to monitor any extensions of credit to customers, and to remain firm in not extending credit beyond reasonable limits based on the customer’s assessment. If outstanding debt arises, you need to have an established approach in managing the overdue payments.
When there are administration errors or cash flow problems, you must set a firm timeframe in which the payment can be expected. If at all possible, avoid making special payment arrangements for customers, as these can often backfire and leave your business financially vulnerable.
You need to have enforcement plan to effectively collect bad debt. Initially, this plan should involve issuing reminder and collection letters and telephoning customers at scheduled intervals. It may also include entering into an agreement with the customer for payment to be made by instalments.
If there is still no payment, then you can consider enforcing payment by the terms of trade. This may involve instigating debt recovery proceedings.
Personal budgets
During the lockdown people have been unable to socialise with friends, eat out or shop for non-essentials. Clearly the temptation here will be to cut loose and enjoy life to the full. Of course, this needs to happen but excessive personal expenditure at this time could do irreparable harm to your business.
There are number of free personal budget templates online and we recommend A.S.I.C.’S https://moneysmart.gov.au/budgeting/budget-planner
It would be a shame to emerge from the lockdown with a business that it is still viable only for things to go awry due to excessive personal expenditure.
Making It Easier for Charities to Access Jobkeeper
Charities that are registered with the national regulator are now eligible for the Morrison Government’s $130 billion JobKeeper Payment if they have suffered a 15 per cent decline in turnover as a result of the coronavirus.
Legislation passed by Parliament just prior to Easter includes a concessional test for ACNC registered charities given the benefit they provide to the Australian community.
A reduced threshold at which a charity is considered to be substantially affected by the coronavirus, as compared to businesses and other not-for-profits, will support a sector which is expected to have a significant increase in demand for its services.
There are more than 57,000 charities employing more than 1.3 million Australians registered with the Australian Charities and Not-for-Profits Commission, providing services ranging from mental health support to access to food for vulnerable Australians.
The reduced threshold follows conversations with the charity sector including ACOSS, the Salvation Army and Catholic Social Services Australia.
The JobKeeper payment will provide around 6 million workers a flat payment of $1,500 per fortnight through their employer.
The $1,500 payment is the equivalent of around 70 per cent of the national median wage.
Every arm of government and industry is working to keep Australians in jobs and businesses in business, and to build a bridge to recovery on the other side.
Eligible businesses and charities can apply for the payment online and are able to register their interest via ato.gov.au (https://www.ato.gov.au/general/gen/JobKeeper-payment/).
New Working from Home Shortcut
The ATO has announced special arrangements this year due to COVID-19 to make it easier for people to claim deductions for working from home.
The new arrangement will allow people to claim a rate of 80 cents per hour for all their running expenses, rather than needing to calculate costs for specific running expenses.
Multiple people living in the same house can claim this new rate. For example, a couple living together could each individually claim the 80 cents per hour rate. The requirement to have a dedicated work from home area has also been removed.
This new shortcut arrangement does not prohibit people from making a working from home claim under existing arrangements, where you calculate all or part of your running expenses.
Claims for working from home expenses prior to 1 March 2020 cannot be calculated using the shortcut method and must use the pre-existing working from home approach and requirements.
The ATO will review the special arrangement for the next financial year as the COVID-19 situation progresses.
Example
Bianca is an employee who works as a copy writer and editor. Bianca starts working from home on 16 March as a result of COVID-19 and replaces her face-to-face meetings with online video conferencing.
Bianca has just bought a new laptop, desk, chair and stationery. She also wants to claim some additional gas, electricity, phone and internet costs due to working from home.
Under the shortcut method, Bianca can now claim all her expenses under a rate of 80 cents per hour. All she needs is her timesheets.
Bianca can also decide to claim using existing working from home calculations. Under that method, Bianca can claim the desk, chair, gas and electricity under the 52 cents per hour, but would need to work out the decline in value of the laptop, and calculate the work-related portion of the laptop, stationery, phone and internet.
Working from home claims for 1 March to 30 June
There are three ways that you can choose to calculate your additional running expenses for the 1 March – 30 June period:
- Claim a rate of 80 cents per work hour for all additional running expenses
- Claim a rate of 52 cents per work hour for heating, cooling, lighting, cleaning and the decline in value of office furniture, plus calculate the work-related portion of your phone and internet expenses, computer consumables, stationery and the decline in value of a computer, laptop or similar device
- Claim the actual work-related portion of all your running expenses, which you need to calculate on a reasonable basis
Working from home before 1 March 2020
Claims for working from home expenses prior to 1 March 2020 should be calculated using the existing approaches and are subject to the existing requirements.
Temporary Protection
Personal super contribution and deductions
Don’t let taxes dampen your holiday spirit! Just like Santa carefully checks who’s naughty or nice, businesses need to watch the tax rules when spreading Christmas cheer. Hosting festive parties for employees or clients can lead to Fringe Benefits Tax (FBT). FBT is a tax employers pay when they provide extra perks to employees, their families, or associates. It’s separate from regular income tax and is based on the value of the benefit. The FBT year runs from 1 April to 31 March, and businesses must calculate and report any FBT they owe. With a bit of planning—just like Santa’s perfect delivery route—you can celebrate while keeping your tax worries in check! FBT exemption: A little Christmas gift from the taxman The tax rules include a “minor benefit exemption”—like a small stocking stuffer. If the benefit given to each employee costs less than $300 and isn’t a regular thing, it’s exempt from Fringe Benefits Tax (FBT). Christmas parties fit perfectly here because they’re one-off events. Businesses can avoid FBT hassles if the cost per employee stays under $300. Remember: the more often you give out perks, the less likely they’ll qualify for this exemption. Thankfully, Christmas only comes once a year! Christmas parties at the office If you host your Christmas party at your business premises during a regular workday, costs like food and drinks are FBT-free, no matter how much you spend. However, you can’t claim a tax deduction or GST credits for those expenses. If employees’ family members join and the cost per person is under $300, there’s still no FBT, but again, no tax deduction or GST credits can be claimed. However, FBT will apply if the cost is over $300 per person. The good news is that you can claim both a tax deduction and GST credits in that case. FBT check for Christmas parties at the office Who attendsCost per personDoes FBT applyIncome tax deduction/Input Tax Credit available? Employees onlyUnlimitedNoNoEmployees and their familyLess than $300NoNoMore than $300YesYesClientsUnlimitedNoNo Think of it like this: at your Christmas party, the food and drinks are like Santa’s bag of gifts – no dollar limit exists for employees enjoying them on business premises. But if you add a band or other entertainment, the costs can add up quickly, and if the total cost per employee exceeds $300, FBT kicks in. Keep it under $300 per person, and you’re in the clear. Christmas parties outside the office If you hold your Christmas party at an external venue, like a restaurant or hotel, it’s FBT-free as long as the cost per employee (including their family, if they come) is under $300. But remember, you can’t claim a tax deduction or GST credits in this case. FBT will apply if the cost exceeds $300 per person, but you can claim a tax deduction and GST credits. Good news: employers don’t have to pay FBT for taxi rides to or from the workplace because there’s a special exemption. FBT check for Christmas parties outside the office Who attendsCost per personDoes FBT applyIncome tax deduction/Input Tax Credit available? Employees onlyLess than $300NoNoMore than $300YesYesEmployees and their familyLess than $300NoNoMore than $300YesYesClientsUnlimitedNoNo Clients at the Christmas party If clients attend the Christmas party, there’s no FBT on the expenses related to them, no matter where the party is held. However, you can’t claim a tax deduction or GST credits for part of the costs that apply to clients. Christmas gifts Many employers enjoy giving gifts to their employees during the festive season. If the gift costs less than $300 per person, there’s no FBT, as it’s usually not considered a fringe benefit. FBT check for Christmas gifts Who attendsCost per personDoes FBT applyIncome tax deduction/Input Tax Credit available? Entertainment giftsLess than $300NoNoMore than $300YesYesNon-entertainment giftsLess than $300NoYesMore than $300YesYes However, FBT might apply if the gift is for entertainment. Entertainment gifts include things like tickets to concerts, movies, or holidays. Non-entertainment gifts—like gift hampers, vouchers, flowers, or a bottle of wine—are usually FBT-free if under $300. So spread the festive cheer, but keep an eye on the taxman to avoid surprises!
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