Why small business must be proactive to survive.
Last week the federal government announced changes to the corporate insolvency regime to introduce a "debtor-in-possession" style restructuring framework and simplified liquidation process targeted at small businesses. In the short term the new restructuring framework - which in the last financial year would have covered 76 percent of companies that entered external administration1 - is expected to minimise to the rate of "terminal failure" by small business when COVID-19 economic relief measures are rolled back.
While the industry is working through the reform's details, from my experience, I can envisage the following potential traps for small businesses seeking to use the new restructuring regime:
- In the short term we must collectively avoid letting negative sentiment about our economic recovery become a self-fulfilling prophecy.
- Small businesses must be more proactive to identify and respond to the early signs of financial difficulty. This will require a shift in the existing approach which, in my experience, generally tends toward inertia until it becomes too late to change course.
Resisting negative sentiment
SME's are particularly hard hit by the COVID-19 pandemic2 and the pathway to recovery ri>ains uncertain. The pandemic's full cost might only be known once the existing economic relief measures are rolled back. To combat negative sentiment on the recovery rate, it usually helps to stay informed and take a balanced view of conditions. The RBA reports and other sources indicate that:
- The COVID-19 economic shock appears to have been short and shallow3 and recovery has been indicated since the end of the June quarter. According to the baseline prediction in the Reserve Bank of Australia's (RBA) August forecast for economic growth, a substantial reversal of the losses might be achieved in 2021.4 On 17 September 2020 the RBA re-iterated that recovery was underway, although it has been "gradual and uneven".5
- With respect to the drivers of the recovery, the Organisation for Economic Co-operation and Development (OECD) observed in its Australian Economic Forecast Summary in the June 2020 quarter:6
- There is ample fiscal space to support economic recovery as needed. The scarring effects of unemployment - especially for young workers - should be alleviated through education and training, as well as enhancing job search programmes. Firms should continue to be supported, including through expanded loan guarantees, accompanied by expedited insolvency procedures. The authorities should be considering further stimulus that may be needed once existing measures expire at the end of the third quarter of 2020.
- In a similar vein to the OECD, a recent report by the Lowy Institute7 posited on the federal government's capacity for additional debt to stimulate economic growth. And observed that East Asian economies are expected to survive the pandemic better than Europe and the US, which might be a positive sign for our export industries, and the economy generally, given that exports to East Asia make up one-sixth of our gross domestic product. In that regard, the RBA reported that in the June quarter the Chinese economy recovered its losses from the previous quarter.8
The need for timely action
The new regime is expected to be less cost-prohibitive than the current system, making it commercially viable for more small businesses to explore restructuring as a pathway out of insolvency.
While cost has certainly made it difficult for many distressed small businesses to go down the path of restructuring, failing to contact us at the first signs of distress is an equally significant impediment. Inaction often leads to a loss of support from employees, suppliers and other key stakeholders, such support can be critical to a viable restructuring plan. It can also result in a creditor, often the Australian Taxation Office, commencing winding up proceedings, which might also foreclose on the prospect of restructuring. However, it's critical that professional advisors recognise and share with their clients that the new regime cannot fix the problems created by failing to take swift and decisive action.
We are here to help small businesses and their advisors by offering timely and practical advice on restructuring and turnaround options, or to assist with a formal exit strategy. If you would like a complimentary, no-obligation consultation please reach out.
1Australian Government Fact Sheet - Insolvency reforms to support small business - https://ministers.treasury.gov.au/sites/ministers.treasury.gov.au/files/2020-09/Insolvency-Reforms-fact-sheet.pdf
2 Lewis, Michelle and Liu, Quang - The COVID-19 Outbreak and Access to Small Business Finance -https://www.rba.gov.au/publications/bulletin/2020/sep/the-covid-19-outbreak-and-access-to-small-business-finance.html?utm_campaign=bulletin-2020-sep&utm_content=covid-19-outbreak-access-small-business-finance&utm_medium=email&utm_source=rbanews
3 Lowy Institute - The Costs of COVID: Australia's economic prospects in a wounded world, 20 August 2020 - https://www.lowyinstitute.org/publications/costs-covid-australia-economic-prospects-wounded-world#sec43376
4 Ellis, Luci, RBA Assistant Governor (Economic), Speech to the Australian Business Economists Lunchtime Briefing, 7 August 2020 - https://www.rba.gov.au/speeches/2020/sp-ag-2020-08-07.html
5 Debelle, Guy, RBA Deputy Governor, Speech to Australian Industry Group, 22 September 2020 - https://www.rba.gov.au/speeches/2020/sp-dg-2020-09-22.html
7 Above n3
8 Above n5. There was no comment on how the Chinese recovery in the June quarter will impact our economy.
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