Wages when Cash has run out
A Director opens online banking and looks at the company Bank Balance and sees the numbers there won't cover the wages due in a week or two.
So the Director looks at how to raise funds to pay the wages:
Which clients can I invoice?
Which debtors can I collect?
Do I have funds I can loan the business?
Can I borrow funds?
With the downturn in revenue in the current crisis, there's less to be able to bill and debtors are saying they are having their own cash flow problems and asking for more time to pay.
What about cutting staff levels? Paying out annual leave, long service leave and other entitlements would make the cash flow problem even worse in the short term. When a company is placed into liquidation the government's Fair Entitlement Guarantee ("FEG") scheme kicks in. Eligible employees can lodge claims (note superannuation is not covered by FEG). FEG replaces employees as creditors in the liquidation for the amounts paid by FEG.
There are some important "checks & balances" to be aware of - Directors need to take care.
This also highlights the need to think ahead and prepare for or have fall back plans for downturns in place.
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