Bibby Financial Services is urging small to medium sized businesses (SMEs) to strengthen their cash flow position now to lessen the risk of liquidity or financial distress, especially after the Australian Tax Office (ATO) is taking a tougher approach to collect outstanding tax debt.
Legal changes in July this year have enabled the ATO to take firmer action against small businesses, particularly those that continually default on agreed payment arrangements.
Bibby Financial Services managing director of global cash flow, Greg Charlwood, said, “When cash flow tightens, the ATO can be seen as an easy and cheap source of short-term funding, sometimes without penalty. Tax debts are often a lower priority when cash starts to become less available — with wages and creditors the first to be paid.
“The tables have now turned and company directors are no longer able to enter into a payment agreement with the ATO, especially after a director penalty notice has been issued.
“The ATO issued more than 6000 penalty notices in the 12 months to June 2010 — more than two years ago and there is an increasing number being issued.”
A director penalty notice allows the ATO to collect outstanding taxes by making directors personally liable for the unpaid tax.
Before July 2010, the ATO allowed a company 14 days to remit the unpaid tax before they commenced recovery proceedings. This term has increased to 21 days and is not negotiable commencing from the date the notice is posted.
The risks of stress on small businesses will only heighten in the coming months according to Charlwood, as small businesses enter into the capital intensive Christmas trading period when business costs can be higher and cash flows are traditionally lower in the New Year.
According to the most recent Dun and Bradstreet Trade Payments Analysis for the September quarter 2010, the average length of time it took businesses to settle their debts increased by 1.1 days to 53.1 days, compared to the same period last year.
As a result of the ATO ruling, Charlwood said that businesses should now proactively consider alternative sources of funding such as debtor finance to manage liquidity and free up cash to pay outstanding debts and avoid financial pressure on the business.
“With banks still cautious to lend to the SME segment and continued pressures from the economy such as rising interest rates, some small businesses will find it difficult to secure financing to help pay out creditors including the ATO, and the consequences can be dire,” he said.
Debtor finance enables a business to convert up to 80 per cent of the value of its invoices into cash almost immediately, instead of waiting until the invoice is paid. It is designed to improve business cash flow and support business growth by releasing cash tied up in unpaid invoices. Unlike other funding arrangements, no real estate security is required making it more accessible for small and medium sized business owners.
“Approximately 5000 businesses are currently using debtor finance in Australia to provide better cash flow,” Charlwood said.