All this talk about safe harbour sounds interesting and useful however if you’re a company director you will probably struggle to know when or even if you should be implementing safe harbour. Because of this there is a vital role to be played by accountants in identifying suitable safe harbour candidates. Often accountants are the first ones who see the financial struggles of a company or business and it is up to them to recognise the signs that a company or business may need to consider implementing safe harbour.
Ideally safe harbour should be implemented just as issues are being identified, not when those issues have been around for years and resulted in the company suffering losses and on a downward spiral to inevitable financial destruction. However we recognise that often directors are too busy working in their business to identify the need to try and turnaround the company.
For accountants and directors – if a company or business shows any of the following signs we highly recommend getting in touch to discuss the options available to save a company:
- Trading losses
- Current ratio below 1.0
- Outstanding tax debt or failed ATO payment arrangements
- Poor relationship with bank
- No access to alternative finance and inability to raise further equity capital
- Creditors going unpaid outside trading terms
- Solicitors’ letters, demands for payment and judgments
A history of trading losses can lead to a shortage of working capital. A prolonged period of trading losses will likely reduce a company’s capacity to pay its debts when they fall due and is a sign of underlying issues in the business which is making it unprofitable.
Current ratio below 1.0
The current ratio examines your current assets ÷ current liabilities. It’s a simple way of examining what you can pay if all your current liabilities were called in at once. A ratio less than 1.0 is indicative of insufficient working capital.
Outstanding tax debt or failed ATO payment arrangements
A failure to lodge tax returns on time and to maintain payments to the ATO is usually a clear sign a company is struggling. At the very least you should be ensuring you are lodging your BAS and tax returns on time, so you avoid possible DPN liabilities, as discussed here. If you cannot pay your entire tax debt you can also enter into arrangements to pay it over time, as discussed here.
Poor relationship with present bank
A bank will usually have more power over a company than any other creditor, given that they will be owed more than anyone and have security over the company’s assets and/or the director’s personal assets. If a company fails to make required payments to a bank the bank may well call in the entire debt unless the bank can be satisfied the company can be saved and has a future worth investing in.
No access to alternative finance
If you are unable to access alternative funding such as from debtor factoring or refinancing, your ability to trade going forward is severely compromised. When going for alternative finance you may require someone like us to clearly set out your trading ability going forward, to ensure you receive the alternative funding.
Creditors unpaid outside trading terms
If a significant portion of a company’s aged payables are outside normal trading terms (usually 30 days, depending on the industry), it is a sign of an inability to satisfy its debts when they fall due.
Solicitors’ letters, demand letters and judgments
The issuing of demands by solicitors is usually an indication that a creditor has exhausted all avenues to recover its outstanding debt. If a company is receiving several of these letters it is a clear sign the company has no money to satisfy the debts.