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If there is one thing that is key to protecting your business and managing debt, it’s understanding the current climate of credit within Australia. Businesses don’t exist in a vacuum. Clients, industry trends, big banks and government actions all affect how (and why) you should take a deeper look into how your company manages its debt. 

As we say hello to a new financial year, the ATO’s recent decisions can have major impacts on the way businesses open credit for themselves and their clients…So, what exactly were the decisions I hear you ask? 

The Tossing of the Coin 

Recently, the ATO sent over 50,000 letters to directors giving them 21 days’ notice to pay the total amount of their tax debts before they would be hit with a Director Penalty Notice (DPN). 

Once a director has been served with a DPN, they can be held personally liable for any tax debts unless they: 

  • pay their tax debt in full; 
  • instate an Administrator for the company; 
  • designate a Small Business Restructuring Practitioner; or 
  • appoint a Liquidator. 

Until recently, a director with a DPN could set up a payment arrangement with the ATO to pay the tax debt off by way of instalments; however, this option was removed from the payment schedule outlined in Taxation Administration Act 1932 (Cth). 

This recent action, combined with the new ability for credit managers to access ATO debts through credit checks means that while businesses have a clearer idea of the financial status of the business (and the director) it is dealing with, business owners need to tighten their own credit management systems to make sure they steer clear of getting caught in a domino effect. 

Heads: Manage the Risk of Your Own Credit Rating 

How can you protect your business from gaining the kind of debt that will have the ATO knocking at your door? Most often we see clients struggle with collecting debt incurred in the usual course of their business by providing trade credit to a customer or client, and not following a strict credit procedure or policy.    We also see clients and debtors alike taking any debt issues they have  one step further and sticking their heads in the sand, making credit and debt management ‘someone else’s problem’.  

Keep track of your approved purchasers 

If an approved purchaser in your business leaves, don’t forget to let your suppliers know they are no longer on the lending list. We have seen multiple cases of businesses gaining debt in their name for the actions of a past employee – and many times, this debt cannot be waived or passed on to the fraudster. If someone is approved to purchase goods on behalf of your organisation,  or if you have approved the purchases of anyone who shows up in your business’ car and uniform, YOU may be ultimately responsible for payment of goods that you have not received the benefit of.  

Know your risk appetite 

Understanding your risk appetite is key to protecting your business’ credit rating. Your risk appetite is the amount of money you are happy to loan from creditors, and what is needed for your regular purchasing needs. 

If a creditor offers to lift your limit based on your solid purchase and payment history really think about whether or not you need the extended line of credit or if what you have is suffient to manage to complete your works . . Much like in personal credit decisions, having a higher spending limit puts you in the position where you can easily spend more than you initially intended to. 

Limit your liability!  

Really know your numbers 

Whatever your business’ financial position, the way to healthy cash flow is to really know your numbers. 

Ensuring you have enough cash in vs. cash out usually can come down to: 

  • sock money away at the right time into different accounts; and  
  • collecting money owed sooner rather than later. 

Managing your cash flow can feel like it’s keeping you away from the more exciting or lucrative parts of your business. Keeping up with invoices, tax debts, rent, and wages really starts to stack up though if you have other tasks on your mind. The team at Optimum Recoveries can help you to manage your credit before it becomes too much of an issue with our Cash Flow Management service. Getting your business in touch with its actual numbers can help you to know what areas you need to knuckle down on, and which areas you need to pay a bit more attention to. 

Tails: How Do You Protect Your Business Against Others 

With all this data available to credit forecasting agencies like Creditor Watch, how can you leverage it to help you avoid risky business? How do you protect yourself from insolvencies and administrations? There are so many ways you, or your credit management team, can learn how to use this data to minimise debt, avoid risk, and ensure you can recover debt if it comes down to that. Keeping a tight leash on client’s extending their terms of credit is also crucial as well as making the tough decision to amend your payment terms to Cash on Delivery or Cash on Order if necessary. 

Know – and enforce – your rights 

As a creditor, it is vital that you seek a credit agreement to protect your business if your debtor fails to pay its debts or becomes insolvent. Furthermore, when entering into any payment arrangements with clients, seek a Declaration of Solvency from Company Directors to protect against any potential preference claim by a Liquidator of a failed company.  

Make sure your foundation documents are up to scratch 

Your foundation documents quite literally set the stage for any activity you can take for your accounts. When the Optimum Recoveries team sets out to recover debt for a client, the first step we take is to review our client’s terms and conditions to see what action we can take and, whether we can improve our client’s ability to collect on future accounts.  

To protect your business should include: 

  • retention of title and protection under the Personal Property and Security Act 2009 (Cth);  
  • a charging clause; 
  • Director’s Guarantees; and  
  • privacy clauses allowing you the ability to monitor information on your customers (including ant tax debt disclosed by the ATO) and list a default.  

If you would like to make sure your foundation documents are water-tight, contact the Optimum Recoveries team for a complimentary credit document, procedure and process review. 

Monitor your customers 

You don’t have to be Big Brother watching 24/7 but keeping up to date with your customer’s credit score before increasing their purchasing limits, or keeping an eye out for any out of the ordinary behaviour could save you the pain of recovery later down the line. Just like a bank wouldn’t give credit to a risky lender, you should be keeping track of your customer to make sure you’re not setting yourself – and them – up for debt. 

Don’t Leave Debt Management to a Flip of the Coin 

With the release of the ATO’s debtor data, it’s more important than ever to manage your debts and protect your business from rising insolvencies. Taking actions to proactively look into your business’ debts, managing who has access to your credit, and creating foundation documents that allow you to monitor your debtors before the need for recovery are all part of maintaining a healthy understanding of your business and its credit risk. 

To manage your cash flow, prevent and manage debt before it happens, or take steps to recover any debt owed to you before it’s too late, get in touch with the Optimum Recoveries team today.