How do you break the cycle and survive?
Over the past 18 months Worrells has experienced a significant increase in liquidations in the transport industry. Why?
We put it down to cut pricing, high competition, the mining downturn and poor planning and management.
In practice, the scenario we are seeing on a regular basis is as follows:
- A business has a handful of trucks, trailers and associated equipment.
- All assets are under finance. Given the current market value of such assets is relatively low, there is no equity; in fact it is not uncommon to see $100,000 shortfall on a truck.
- Often a business loses a key client (representing over 50% of their income stream) or a key client fails to pay their outstanding debt (e.g. due to liquidation or bankruptcy).
- Given the decreasing sales and cash flow, the business is desperately hunting for new work.
- Given the shrinking market there is an oversupply of transport businesses.
- The business is taking on work under market rate to win the work even though it is unprofitable in the long-term, which leads to increased losses and further strain on cash flow.
- While this is all going on the business needs to keep serving their finance payments on the equipment.
- The business cannot sell surplus equipment on the market to reduce cash-flow problems given the lack of demand and value in the equipment.
- It is identified that if the finance payments are not met the trucks will be sold and a massive shortfall realised.
- Unless this cycle is somehow broken the result is:
- vehicle maintenance and repairs do not occur (unsafe vehicles on the roads);
- employee entitlements such as superannuation seldom get paid;
- ATO taxes and withholding amounts not paid; and finally
- A creditor (usually the ATO or a finance company) pushes the business into liquidation.
The reality is many businesses are being operated almost solely on the funding of not paying employee’s fair entitlements or the obligations to the ATO on the hope that they will improve and start paying off all the debt incurred, while working for peanuts.
Unfortunately we can’t see anything changing for the highly competitive transport industry any time soon. The frustrating part is that businesses are not taking proactive action in an attempt to rectify the situation. If the businesses sought advice from their advisors, there may be options available to ‘break’ the cycle. These can include, diversifying the business, implementing a strategy that relies less on one or two key customers, an increased debtor collection strategy, a controlled sell down of equipment, factoring options to increase short-term cash-flow, refinancing options, reduction of surplus resources including staffing…the list goes on. If the position is quite serious then a discussion with an insolvency practitioner may present other options, including a Deed of Company Arrangement that may provide a solution without liquidating a company.
None of this can occur if the business doesn’t seek assistance from their advisors and consequently the cycle will continue.