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03 Nov 2021

When COVID-19 and Christmas trade collide

READ TIME

5 min

TAGS
COVID-19

How to avoid the perfect storm.

A few years back I wrote about “the lead up to Christmas can be a busy time in the insolvency industry” and how to avoid a visit from the Christmas Liquidator. This article, pre COVID-19, was in response to the Australian Securities and Investments Commission (ASIC) past statistics showing that between September to December has some of the highest levels of corporate insolvency administrations. Although insolvency numbers have been suppressed over the last 18 months—times are changing and a return to normal insolvency numbers is expected. Over the next six months we will start to see state and international boarders open up, businesses starting to resume their normal flow, government assistance packages substantial reducing, and creditor pressure, including the banks and the Australian Taxation Office (ATO), for outstanding debts starting to bite. These circumstances could see a perfect storm brewing for businesses suffering from insolvency concerns over the next six months. So what should you do and how can Worrells help? The first step is to plan and budget. Planning and budgeting are essential to determine how much cash is needed to make it through the silly season and beyond. Any business budget must:
  1. Reflect realistic external and internal factors…it’s not wishful thinking.
  2. Contain detailed and comprehensive information—all aspects of the business are incorporated.
  3. Recognise any seasonal fluctuations.
  4. Consult/communicate with stakeholders.
  5. Provide for cash-flow forecasts.
  6. Allow easy comparison to actual expenses incurred.
Unless you can measure your results and plan for the business’s future, you might find yourself getting a better return at the casino! If you need assistance with this step, we can work with you and your accountant. The next question is WHAT if my plan and budget shows a negative outcome? The first questions to ask are:
  1. Is this a short-term cash-flow problem, or?
  2. A longer-term insolvency issue?
If it is a short-term “cash-flow problem” the following is relevant to successfully trading out of the cash-flow problem:
  • Cash is KING!
  • Control stock purchases and capital purchases.
  • Talk to the bank.
  • Broker repayment terms with suppliers
Cash is KING! Businesses must have cash to survive—especially when revenue is reduced but the bills keep coming. Just sending invoices and hoping for payment is not good enough. If dealing with other small businesses, chances are they’re experiencing cash-flow problems and therefore may delay payment. Get on the phone and push for payment. If necessary, engage a debt collector or lawyer to assist in recovering your debt. Some people understandably don’t want to upset their customers…particularly from a business community perspective as COVID-19 struggles are ever-present. But what if a customer’s non-payment sends your business to the wall?! Also, business owners must look at the revenue base and take appropriate strategic decisions to secure and expand future sales. Control stock purchases and capital purchases When cash is short, control outgoings. If possible, look at delaying any capital purchases and closely control stock levels. Any unnecessary ‘cash burn’ should be avoided during the seasonal ‘downturn’. If certain capital expenditure is required during the slower period—look at negotiating payment terms later in the new year to improve your cash-flow position. Talk to the bank Having a ‘Plan B, credit reserve strategy’ available for those unexpected events may be the difference between survival and closure. But the key to an effective Plan B is having it conditionally viable before you need it. My experience is that business owners are unlikely to obtain a positive response from the bank to get an overdraft facility approved when there’s already a problem. Although other organisations on the market may provide short-term finance—it usually comes at a substantial price, given the likely risk of insolvency. The message here is, get the funds/facility before it’s needed and don’t be tempted to use it for unnecessary reasons. Broker repayment terms with suppliers Sometimes you need ‘a little help from your friends’ (or suppliers) in tough times. Speaking to suppliers and negotiating repayment terms may assist in managing cash-flow problems. Obviously, before negotiating terms and incurring further debt, business owners should always consider any critical insolvency issues in their business and director duties to avoid insolvent trading. The last thing you would want to do is incur further debt with your suppliers with no capacity to repay those debts. This type of activity is likely to get you in hot water with ASIC and any future liquidator. However, if the business is profitable and the business plan shows a road to recovery—speaking with suppliers for extended or different repayment terms to get through a tight period is an option. What if I need further help? Here is where Worrells can assist to solve longer term solvency problems via debt negotiation arrangements, formal and informal restructures. These options include:
  1. ATO and creditor debt negotiations.
  2. Informal workouts.
  3. Small Business Restructuring.
  4. Voluntary administration.
  5. Safe harbour.
Further details on the above options, and information on insolvent trading can be found in our Guide to Corporate Insolvency (click here) Obviously if a business can’t be saved, we can discuss all the options to wind up a company and control the financial fallout. Speak to us today for a confidential and obligation-free discussion on how we can help. All our initial consultations are free of charge. Worrells is a national Group, but all our partners are local to your area and here to help no matter the size of the business, model, or industry. Click here to register your interest in receiving a complimentary call from your local Worrells partner.

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