Plant & Equipment

Preparing for the next upswing

As any prudent business owner would know, the prospect of significant additional work comes with its own challenges.

At face value, increased turnover and greater profit through a combination of gross margin and improved economies of scale paint an attractive picture at a basic profit and loss level. However, there is much to control through this process.

This article seeks to address just a few of these issues.

The 60- to 75-day cash lag between paying for additional machines (and labour to operate them) and payment for the work reaching your account is one of these challenges.

Several simple levers can be used to minimise this significant gap:

1. Finance new machinery with monthly payments in arrears, instead of in advance. This is commonly available through financiers and immediately reduces that component of the cash gap by 30 days.

2. Look to refinance existing equipment over an extended time (being mindful of its effective life in your fleet). A large number of financiers are now happy to refinance machines within 12 months of existing contract termination. The benefit to business owners is that any early termination cost is minimal in the final 12 months, and current interest rates are substantially lower than the interest rates of the initial transactions. This structure is particularly attractive where residuals or balloons are present on the existing facilities, as they typically need to be refinanced later anyway.

Prudently done, companies can see outgoings reduced substantially, providing “head room” within existing cash outflows to take on additional equipment with minimal cash flow pain. When company principals are contemplating increased overdraft facilities, it is advisable that they look to any increased value in the residential or commercial premises, as these can secure extremely low cost, flexible lines of credit where interest costs are deductible provided the debt is in the company name. These facilities are typically substantially cheaper than an overdraft, are not subject to annual review, can be paid down and redrawn at will and do not require a supporting charge or general, selling and administrative expenses over the business.

3.  If all other areas of flexible low cost debt are tapped out, the prudent short to medium term use of a debtor discounting facility has a place for expanding businesses to bridge the cash flow gap until cash from profitable increased trading hits the bank account.

Delayed payments to the Australian Taxation Office (ATO) in the form of a quasi-overdraft are highly discouraged, as they have a strong likelihood of ending badly – not only because the ATO is significantly ramping up collection activity and liquidating an increasing number of companies, but also from a finance perspective, as low cost lenders are increasingly refusing to finance companies with tax arrears.


Will you be paid?

The above has focused on cash flow timing, and it makes the bald assumption that you will actually be paid.

With an increasing number of high profile companies in the quarry and civil and related areas going into receivership, and the recent press around hapless creditors not only not being paid but being pursued to repay prior payments under “preferential payment clawback” provisions, it is worth spending a moment on this.

Many business owners would be aware of horror stories around equipment being seized through incorrect implementation of the new Personal Property Security Register (PPSR) rules. There is, however, one shining light in this very dark tunnel, and that is the ability through the PPSR system to position your company as a “secured creditor” on any supply of payment terms to your end user client.

This not only protects you from the spectre of a preferential payment clawback, but it also ranks you ahead of unsecured creditors and the ATO if your client is put into receivership.

The process is quite simple, can be covered within a typical master supply agreement, and the whole process can be outsourced efficiently and at minimal cost.

In a world where getting the paperwork right is paramount, this area is worth some attention. 

Mark O’Donoghue is the founder and CEO of Finlease.

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