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3.Banks and the ATO expect good records
Lenders and the Tax Office expect your company records to be in excellent order

Excellent financial records are the best tools available to company directors who wish to apply for finance during periods of growth, or at times when they are seeking a favourable outcome from the Australian Taxation Office (ATO).

Ensuring that your company does not trade while insolvent is one of the most critical legal duties of all company directors. Fortunately, if you follow best practice when it comes to keeping your financial records, and use those records to ensure your company's performance is optimal, you have many tools at your fingertips.

Such tools won't just ensure your company stays solvent, but should also be useful if you wish to make a positive impression when seeking finance.

Companies of all sizes need to seek finance (borrow funds) from time to time. Provided your borrowing levels don't get out of hand, finance can be a good source of day-to-day working capital. However, the most common reason for companies to borrow is to fund periods of major growth and expansion.

Banks have tough terms and conditions when lending to companies, particularly if you are running a small-to-medium enterprise (SME). They will expect impeccable financial records that can demonstrate both your:
  • Ability to service the loan and make regular repayments
  • Ability to repay the whole outstanding amount
Smart company directors will, however, go one step further than meeting those two minimum requirements. They will also make sure they have plenty of 'headroom' if financial or trading conditions were to change rapidly and force a lender to unexpectedly "call in" their whole loan.

The best tool available to directors to ensure that headroom is available is cashflow. Profit and loss statements sometimes don't tell the whole story about trading conditions, business costs and solvency. Cash flow statements can't hide anything. The availability of cash is your best indicator or how much headroom you have.

What if cash is tight?

If your cash balances and budgets are looking tight, one of the most important questions to ask yourself is whether your company can pay its taxes when they fall due. If the answer is 'no', the worst thing you can do is 'nothing'. Contact the ATO immediately to negotiate a payment plan but make sure you are prepared.

Again, if your financial records are impeccable, you will have a much better chance of gaining a positive outcome for your business. The Taxation Office will expect to see the same level of detail as any lender so always be prepared.
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