Posted by Revive Financial on Aug 3, 2020 2:14:00 PM

With lockdown restrictions easing and Government stimulus payments flowing, business owners need to look closely at the future of their businesses.

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

For businesses still trading, or hoping to recommence trading in the near future, the hard work may yet be ahead. The focus now needs to be on managing cashflow 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? Business owners still have time to make necessary changes, 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 cashflow to continue operating?
Can my business realistically be viable post-lockdown? If so, what is my strategy to return to profitability?
Do I need to downsize my business for a reduced level of turnover?
If my business is viable but has accrued debts it is unable to pay, how will I deal with these?
Is my business insolvent or likely to become insolvent in the future? If so, what are the legal considerations if it continues trading?

For many, the answers to these questions will be “I don’t know”. This may be OK when a business is humming along and paying its bills. But if it isn’t, ongoing trading could cause further loss and distress for the business and for other parties who interact with the business.

Business owners don’t need to have all the answers themselves. These are unprecedented times and a prudent business owner will turn to their accountant, lawyer and bookkeeper for guidance. These trusted advisors and their extended professional networks have the experience to tackle these questions, and are currently assisting others in the same position.

Do I have enough short-term cashflow to continue operating?

Cashflow management can seem somewhat elusive, and even impossible to forecast at the moment. But, with help from your accountant or bookkeeper, you need to 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.

The Government’s stimulus has been focused on assisting businesses with cashflow 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 cashflow 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-lockdown? 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. But it’s you as the business owner who stands to lose the most; your 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 financiers will end;
  • Lease payments will need to recommence, including payments towards any rent deferred during lockdown; 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.

Know this: you’re not alone. Everyone else in your industry is facing the same challenges.


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.

If my business is viable but has accrued debts it is unable to pay, how will I deal with these?

Once you’ve returned your business to sustainable trading, it may have accrued debts that it can’t pay. These may be further complicated where personal guarantees were given which the creditors can call on. The company and personal claims will need to be dealt with separately.

The options to deal with accrued debts are:

  • Obtaining funding through debt or equity injections may be required in order to recapitalise the business and pay down debts in full;
  • Alternatively, informal settlements may be negotiated with landlords, banks and suppliers to pay their debts over time, or settle them for less than the full amounts; or
  • If negotiations alone are unable to achieve the required reduction in the company’s debts, it will need to look at restructuring through a formal insolvency appointment. The main options are:

In either type of insolvency appointment, a company’s business and/or assets may be purchased from the insolvency appointee. If such a sale occurs before an insolvency appointment, as a business owner you must exercise extreme caution to avoid the sale being characterised as illegal phoenix activity.

Is my business insolvent or likely to become insolvent in the near future? If so, what are the legal considerations if it continues trading?

A company is insolvent if it cannot pay its debts as and when they fall due, or within a reasonable period thereafter. Many businesses are now finding themselves in this position. Ignoring it will not fix it; early engagement with professional advisors is critical to examine the company’s options.

A director owes a number of duties to their company, including to not trade whilst insolvent, and also to act diligently, in good faith and for a proper purpose. Breaching those duties exposes the director to civil claims and criminal offences.

While the Government intervention has given directors some relief from insolvent trading, this ceases in September. Companies continuing to trade may obtain ongoing protection for their directors by accessing the Safe Harbour provisions in the Corporations Act.

Safe Harbour is an option that is likely to be used increasingly in the coming months. It allows directors of financially distressed companies an opportunity to turn around their business free of the concerns of being personally liable for company debts under insolvent trading.

If you are looking to rely on Safe Harbour from 25 September 2020 onwards, you should begin preparing as soon as possible to ensure eligibility from that date.

Companies which may be insolvent and are not eligible for Safe Harbour, will require an insolvency appointment. As discussed above, voluntary administration, for businesses wishing to continue, or liquidation, for those looking to close, are the options to consider.

What should I do now?

The coming months are critical for businesses adversely affected by COVID-19 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 and bookkeeper to understand your answers to the above questions and determine what steps you should be taking for the future. If you believe your company may already be trading insolvent or at risk of trading insolvent and you're unsure of your options, please get in touch with our team at Revive Financial on 1800 534 534 to discuss your options.

This article was authored by Jarvis Archer and Robert Champney. Jarvis Archer is a business restructuring specialist and liquidator at Revive Financial. Robert Champney is a litigation and insolvency lawyer at Redchip Lawyers.

Topics: Director Advice, Turnaround & Restructuring, Business Debt

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