There are many supports available to business that includes JobKeeper, as well as changes to insolvency legislation and deferral of bank loan repayments and relief for commercial tenants. But these won’t last forever. It is vital to understand the financial risks and impacts of poor cash flow, debt, and business remodeling options during this government policy phase.
How can you use these supports to keep your business going now, build resilience in your business and prepare for the future for when the government phases out stimulus relief?
- What does insolvency mean at this time compared to normal trading conditions?
- What are the insolvency options for companies and individuals?
- How do we understand the announced Government assistance and insolvency laws?
- What strategies can we put in place to get through this time or be in the best position for when the crisis is over?
Watch the video to listen to this discussion in detail, or here are our key takeaways:
1. It’s never too early to seek expert advice.
If you feel your business is not going in the direction you want, seek advice early. Don’t wait for crisis to hit. The sooner you seek advice the better chance you have of turning things around.
2. Turnaround Strategies that can be used where disruption has had a major impact or might lead to an ongoing risk
Different strategies work for different businesses. Here is a list of strategies that Rapsey Griffiths uses with clients to turn things around, manage a crisis and be in a better position for once the crisis is over.
- Review the Profit and Loss and identify any costs that are non- essential to run the business. For example: subscriptions to software and other services that are only used occasionally and not needed on a day to day basis, non-essential entertainment for directors and staff etc
- Understand the numbers. Prepare revised financial forecasts and run different scenarios, i.e. what does it look like if sales drop by 20%? What happens when rental relief and or repayment holidays stop? Run a live forecast, know where you are at on a weekly basis or daily if things get critical.
- What’s the core business or offering? Refocus on profitable lines of business or the main business.
- Non core or underutilized assets. It can be better to hire assets that are not used regularly and sell underutilized assets to raise capital to put into the business.
- Consolidate operational sites. You may run various sites, do you need them all in the COVID environment?
- Focus on cashflow. Daily checks on working capital, cash at bank, debtors, accounts payable. Offer early payment discounts to debtors, keep a tight watch on the amount of credit that is given, actively follow up debtors, monitor stock levels (don’t be overstocked), communicate with your creditors and negotiate favourable payment terms.
- Stakeholder communication is key. Provide key stakeholders with updates on how you are travelling. Your message must be consistent and transparent:
- When dealing with your bank or funder, let them know where you are at and what your plan is. Don’t put your head in the sand.
- When dealing with staff, be honest and involve senior staff and key management in the turnaround process. Employee buy-in is key.
- When dealing with trade creditors and landlords, don’t over promise and under deliver. Be realistic with them.
- Workforce planning: Do you need the level of staff you had pre-COVID? A small reduction in your workforce when trouble first hits, can save further redundancies down the track.
- Review your operational and strategic plan: Although this should be monitored at least annually. Now is a time to look at how you do things, and what your plan looks like.
3. What is insolvency and what options are available to resolve it
Insolvency is when a company or individual cannot pay its debts as and when they fall due.
Options for an insolvent company
Options for an insolvent sole trader or partnership
4. Changes in insolvency laws during COVID -19 that can ease the pressure on business
COVID-19 Safe Harbour Defence
Pre-COVID directors could be made personally liable if found to be trading whilst insolvent, i.e. continuing to incur debts when they know or should have known that they could not pay them back.
Now a COVID-19 safe harbour defence is available for directors from civil insolvent trading liability. This was introduced in March and extends to 31 December 2020. It protects directors from insolvent trading liability for debts incurred during this period.
Extension to debt recovery provisions for statutory demands and bankruptcy notices
The period for compliance for these have been extended from 3 weeks to 6 months. The minimum debt to which these processes can apply has been increased up to $20,000 from $2,000 for statutory demands and $5,000 for bankruptcy notices. Again these arrangements apply until 31 December 2020.