Do you think you're insolvent?
The main test is being able to pay your bills. The law says you are insolvent if you can’t pay your debts, as and when they fall due. Trading while insolvent has significant penalties for directors.
But as part of their COVID rescue plan, the government provided temporary relief for directors from these penalties. This provided welcome relief for the short term, but has it just delayed the inevitable?
There are a number of indicators of insolvency, although any one on its own is not conclusive. But if you’re starting to tick off a number of them, then you should see someone.
1. Continuing trading losses
2. Poor liquidity ratio (below 1)
3. Overdue taxes and statutory obligations
4. Inability to borrow additional funds, no access to alternative finance
5. Being placed on ‘cash on delivery’ (COD) terms with suppliers
6. Creditors unpaid outside trading terms
7. Dishonoured payments
8. Payments to creditors of rounded sums, not reconcilable to specific invoices
9. Solicitors’ letters, summonses or judgements issued against the business
10. Inability to produce timely and accurate financial information to show the trading performance and financial position, and make reliable forecasts (per ASIC v Plymin (2003))
COVID-19 has placed enormous financial strain on many businesses. As the economy comes out of lockdown it is critical to stay on top of your financial position.
This means you need to review the following reports each month:
Your Profit & Loss Statement
A 13 week Cashflow Forecast
Full Accounts Payables listing
These are unusual times for the economy. It will take careful and diligent management of your business to make it through.
Let me know if you need a hand navigating these troubling times.
Peter