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Planning for future success

The likelihood of a swift business turnaround occurring after the impacts of COVID-19 lifts is a matter that is hotly debated in the business press. We hear of V curves, U curves or even W curves; who really knows?

In our view, we think it likely that the economic planning suggesting a slow return to pre-COVID economic activity seems most likely, and this is consistent with the early experience of businesses we are observing. We see that subdued demand levels are the current experience for many businesses (particularly customer-facing businesses) with consequential unemployment / underemployment occurring.

As a result, we recommend businesses revisit their financial models to recalibrate expectations when the Government stimuli comes off after September. When this happens, we expect that the current debt collection restrictions will also be lifted or modified, and therefore businesses need to plan now how to address creditor demands in order to avoid being caught in the much-speculated wave of future insolvencies.

Our recommended approach for businesses now is to:

• Stress test the forecasts already in place in order to understand the impact of reduced cash flow from underperforming turnover.
• Start managing commitments made to creditors whose debts are planned to be met over time. Communicate early any variances to the agreed payment plans that the stress testing highlights as becoming likely.
• Ensure those employee obligations with respect to wages and superannuation are met as a priority out of cash flow, in order to keep faith with the core resources that are essential to your business survival.
• Make sure ATO payment plans for old debts are bedded down, and new tax obligations are met on time.

Be aware that if budgeted cash inflows are consistently being missed, then budgeted cash commitments made in the expectation of those inflows will also not be met, and the business will start tracking backwards towards insolvency.

Ultimately, the current reprieve on the Insolvent Trading offence will be lifted, and directors will be held accountable for their business’s performance.

We urge vigilant management of cash flows and the monitoring of the early indicators of insolvency in order to avoid business failure and financial loss.

We are able to assist directors of businesses to understand their financial position and a wide array of options that are available should the early indicators of insolvency suggest help is required.