Many businesses have managed to survive in the COVID impacted economy by:
- transforming their businesses to operate in an online environment;
- relying on indulgences from creditors (landlords, suppliers, ATO);
- taking advantage of Federal and State Government stimulus measures.
So what happens in late September 2020?
September 2020 will be a critical month for many businesses and the economy in general. In late September:
- JobKeeper payments will reduce for some businesses and cease altogether for others (depending on eligibility criteria);
- Protections for directors afforded by temporary legislation will cease (unless extended).
This means that at some point between September 2020 and March 2021 when COVID support ceases, business owners will face combined pressure of the need to once again rely solely on their own turnover as well as creditors seeking to recover debts (some of which could have been outstanding prior to March 2020).
Q: What do you do?
A: Develop a plan for the future, implement the plan and continually review the plan
Prudent business owners should plan for these changes now. In particular, business owners with the help of their accountant and advisors should look to assess the viability of their business in a post COVID world in an objective manner.
- If the business is viable in the longer term, its cash flow may simply need support in the short term whilst the economy adjusts to the withdrawal of support from the Government. The best way to plan is to prepare a cash flow forecast.
- Any forecast should be prepared using sensitivity analysis (e.g. on a reasonable expectation basis as well as a worst case scenario) to identify instances of possible negative cash flow. This will enable plans to be formulated to deal with these instances in advance;
- Options to deal with these instances will usually involve engaging with financiers, suppliers, landlords and the ATO to negotiate repayment plans. Any payment plan needs to be conservative to ensure that the cash flow of the business isn’t adversely affected;
- Most creditors will be expecting such requests and many credit managers including the ATO will be receptive to customers that act in a proactive and open manner;
- If the business isn’t viable, that should be identified early so that a plan can be formulated to turn the business around.
- Any plan should address what needs to change in the operations of the business to make it profitable. There may be only a few changes that need to be made to a business to restore or increase profitability;
- Any turnaround plan will likely include negotiating payment plans with creditors and financiers as mentioned above;
- Business owners should try to avoid accessing personal resources to support the cash flow of a business that isn’t presently viable without first assessing whether the business can be viable once again.
Directors of companies should also consider the following when developing any plan:
- Temporary Insolvent trading protections
Company directors can be comfortable that they may not be held liable for insolvent trading during the period March to September, however there are conditions to these protections.
- Safe Harbour
Directors of companies may also wish to minimise any risk of personal liability and take advantage of the existing safe harbour provisions in the Corporations Act. These provisions afford directors protections when undertaking an informal turnaround process and will continue after the temporary protections from insolvent trading cease.
- Personal liability for company debts
Directors of companies may still be held personally liable for unpaid superannuation, PAYG and GST that is not reported within 3 months of the due date.
Now is the time
Now is the time to undertake this process. Creditors, including the ATO, expect business owners to be proactive in the management of their business and will be less likely to entertain repayment plans, debt compromises etc when business returns to “normal” (learn more here: ATO Covid-19 Support).
With the exception of certain stimulus measures offered by the Federal Government, there is no free ride in business. Owners should expect to repay fixed overheads (eg. rent) incurred whilst their business is not operating at capacity or in hibernation. Interest will still accrue on debts such as bank loans and certain agreements with suppliers.
Here to help
We:
- provide practical, impartial advice as to the options available to business owners, including providing feedback on a plan that has been developed and the likelihood of success;
- aim to be the professional’s partner. We explore all options to address financial difficulties faced by businesses both informal and formal;
- don’t charge for initial meetings which can be conducted via telephone, video-conference or in person.
Learn more about our services for businesses and individuals.
Written by Stuart Otway and Travis Olsen – SV Partners Adelaide