Managing The Debt Drain – The Critical Small Business Issues

March 2017 

Many small businesses struggle at this time of year to balance revenue against outgoings so what are the issues that arise if you're not on top of cash flow? 

February and March are often the most difficult cash flow months for small business as payments slow down or customer spending eased back over the summer months. Even if your business is okay, your customers may be under pressure and in some cases, whomever applies the greatest pressure or influence gets paid first. Late payers are the bane of business owners and two Government measures tackle the small business debt issue from different ends of the spectrum. We take a look at the issues and their impact on business - and what you can do about managing obstinate debtors.

ATO adding tax debt to your credit record

From 1 July 2017, the Australian Taxation Office (ATO) will inform credit rating agencies of businesses that have outstanding tax debts. Given 65.2% ($12.5 billion worth) of these late payers are small businesses, the move will put significant pressure on business operators to prioritise tax debt above other creditors. 

Announced in the Mid-Year Economic and Fiscal Outlook (MYEFO), the plan will see the ATO disclose the tax debt information of businesses that have "…not effectively engaged with the ATO to manage these debts" to credit agencies.  

If your business has a tax debt and you've not taken steps to work with them directly or via your accountant, this move will impact the business's capability to access new finance or potentially to maintain existing finance levels without first addressing the debt to the ATO. 

There are two problems with this approach. The first is that once your credit rating is downgraded, it's very difficult to repair.  The second is the legitimacy of the ATO's tax debt claim – what if it is wrong?

The measure will initially only apply to businesses with Australian Business Numbers and tax debt of more than $10,000 that is at least 90 days overdue. We have little doubt however that this measure will eventually extend to all tax debtors. 

The important thing is that anyone with an outstanding tax debt should engage with the ATO as soon as possible.  This will prevent the credit agency threat being triggered.  If you are in this scenario, your accountant can help by engaging the ATO on your behalf. 

Why big businesses don't pay small business on time

At the other end of the spectrum is the Payment Times and Practices Inquiry by the Australian Small Business and Family Enterprise Ombudsman (ASBFEO).  The inquiry's issue paper reveals that collectively, Australian small businesses are owed around $26 billion in unpaid debts at any one time. 

In the last financial year, late payments have increased for six out of ten SMEs with one in four businesses experiencing an average payment delay of 31 to 60 days past agreed terms. Debt plays a significant factor in a business's cash flow and survival. If larger businesses don't pay smaller suppliers within the terms of trade, the small business often has to resort to external funding to manage the cash flow requirements of the business. 

The inquiry is looking at options to improve the payment times of large business. Some of these solutions are already in play in some States such as a requirement for large projects to use supply chain finance where project bank accounts hold funds in trust to ensure supply chain participants are paid. 

Other solutions are in the 'naming and shaming category' where large businesses would be obliged to report their current payment times or for smaller businesses to report late payments.  

The inquiry is expected to deliver its final report to Government in early April  2017. 

What to do about debt

Dealing with delinquent debtors is painful, particularly when you can't afford to lose the customer.  The most obvious tactic is to stay on top of debtors: Ensure that your contracts and invoices have clear payment terms, and you have a procedure to follow through once a customer breaks these terms. Importantly, ensure you keep a record of actions you take to recover debt.  This record will come into play if you have to use a more formal resolution mechanism. 

Options if customers don't pay

Ultimately, some customers will not pay you even if your terms are clear and you have done everything in your power to recover the debt. Often small businesses just give up and don't deal with the customer in question again.  Some of the other options available to you are:

  • Final letters of demand with the relevant court documents attached.  Legal document provider LawCentral has a clever product for this that takes you through the Letter of Demand to the appropriate court documentation.  Sometimes the letter will be enough to trigger action from the debtor to pay but you must have the intent of following through.  These kits are available for NSW, QLD, VIC and  WA.  
  • Engage a debt recovery agency. Commission rates for debt collection services vary between 5% and 30% of the value of the debt.
  • Sell the debt for a small percentage of the owing value. 
If you find your business is approaching a cash crunch, talking to your Accountant early is very helpful to look at options to get you through until cash flow returns to normal. Just don't leave it too late. 

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This article is provided for information purposes only and correct at the time of publication. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.

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