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Your business: rebounding from the COVID-19 downturn

With lock-down restrictions easing in Queensland and Government stimulus payments flowing, business owners need to take a serious look at the future of their businesses.

Businesses that remain closed need to realistically consider whether they can re-open. Those businesses receiving JobKeeper payments as their only activity should assess whether they will be able to pay suppliers, landlords, employees and the Australian Tax Office (ATO) – as well as themselves – in the future.

For businesses still trading, or hoping to recommence trading soon, the hard work might still be ahead. The immediate focus needs to be on managing cash flow and returning to profitability. This is especially important if a business is relying on Government stimulus and other relief, which is expected to come to an abrupt end between July and September.

The good news is that business owners still have time to make some key adjustments, so that their:

  • employees have a business to return to; and
  • business becomes profitable again – and stays that way.

A Framework for Rebuilding

The questions business owners need to ask themselves now, and on an ongoing basis, are:

  • Do I have enough short-term cash flow to continue operating?
  • Can my business realistically be viable post lock-down? If so, what is my strategy to return to profitability?
  • Do I need to downsize my business for a reduced level of turnover?

At the moment, your answers to these questions will be “I don’t know”. That might be fine when a business is humming along and paying its bills. If that's not the case, continuing trading in the same fashion could cause further loss and distress for the business and others who interact with it.

Business owners don’t need to have all the answers themselves. These are unprecedented times and a prudent business owner will turn to their professional advisers – especially their accountant – for guidance. Our advisers (and our professional networks) have the experience to help you resolve these questions, and we're assisting other businesses in the same position.

Do I have enough short-term cash flow to continue operating?

Cash flow management can seem elusive, and even impossible to forecast at the moment. Our accountants can help you make your best assumptions to work out on a weekly basis over the coming 2-3 months, how much cash is coming in and how much cash will need to be paid out.

Understanding and accurately forecasting your cash flow could be critical to your business's recovery and survival.

The Government’s stimulus has been focused on assisting businesses with cash flow to get through the toughest times. But when JobKeeper and other stimulus ends, your business may require additional finance or significant changes to accommodate a reduced turnover and become cash flow positive.

When you know you’ve got enough cash to keep going, you can then focus on longer-term plans.

Can my business realistically be viable post lock-down? If so, what is my strategy to return to profitability?

Often business owners will put everything into keeping a business going until it’s forced to close.

This approach is like pouring water into a leaky bucket and may cause loss to those who support your business. As the business owner, you stand to lose the most; reputation, finances, health and relationships can suffer with the stress of trying to deal with a business that doesn’t make money.

At a minimum, your business needs to have a realistic prospect of remaining, or returning to, break-even and then profitable trading. If this is unlikely to happen, your business model needs to change or you should cease trading to avoid further loss.

While your business may be able to break even for now, from around September 2020:

  • JobKeeper payments and other Government stimulus will decrease;
  • businesses will be able to recover their unpaid debts and directors will become personally liable for debts their companies incur if it is deemed insolvent;
  • payment holidays from banks and lenders will end;
  • lease payments will need to recommence, including payments towards any rent deferred during lock-down; and
  • the ATO will ramp up debt recovery action, including exercising new credit reporting powers and issuing Director Penalty Notices, making directors liable for unpaid BAS and superannuation debts.

With ongoing workplace restrictions due to COVID-19, it’s difficult to forecast the future with any certainty. You will need to work with your best estimates and analyse scenarios where things may be better or worse than expected.

Where it is unclear if your business will be able to pay its wages, tax, rent and bills, you need to tread cautiously and review your trading results and outlook to ensure losses are minimised if your business doesn’t succeed.

Do I need to downsize my business for a reduced level of turnover?

Options to increase turnover may be currently limited to increasing prices, enhancing online offerings or making changes to increase sale values to a lower number of customers.

If your business won’t be able to return to its pre COVID-19 level of turnover, its fixed and discretionary costs will need to be reduced to remain viable at a lower income level. Tough decisions to downsize premises, workforce and asset holdings may be required to bring the bottom line out of the negatives.

There may be residual debts as a result of these changes, but these will need to be dealt with separately once the business has restored profitability. Continuing the business in an unprofitable state will not help minimise these debts.

The employment landscape has changed significantly over the last few months with JobKeeper. However, the temporary amendments to the Fair Work Act as a result of the COVID-19 pandemic are due to end on 28 September 2020, meaning that employees’ hours and rates of pay will be expected to return to their usual levels. This poses a significant issue for businesses at the end of September: the decrease in Government assistance and an increase in staff costs but uncertainty about business profitability.

Employers may need to:

  • negotiate with their employees on variations to an employment agreement to reduce hours and rates of pay – but employees are under no obligation to agree to that request.
  • make their employees’ positions redundant if their business has experienced downturn, and other options to vary the employment terms have been exhausted. An employer should be careful when considering redundancy to ensure it: complies with any relevant award, employment agreement, or enterprise agreement; has exhausted all avenues of re-deployment; and pays the correct entitlements, which can often be substantial.

While downsizing a workforce can be very difficult, it’s important to remember that having some jobs is better than no jobs.

What to do next?

The coming months are critical for businesses adversely affected by COVID-19, if they want to  to position themselves to survive and thrive once current stimulus and temporary concession measures cease.

Now is the time to be talking to your accountant at The Peak Partnership to understand your answers to the key questions in this article and determine what steps you should be taking for the future.

Our team has developed a 'Business Rebound' process that focuses on cash flow forecasting, budget planning and Government entitlements as the high priority tasks to keep your business going. Contact one of our team if you want to know more about how we can help your business recovery.

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