We’ve now entered week three of lockdown and the future (as far as the virus spread goes) looks good. Business owners have had time to reflect on where their business may be headed. Some are naturally optimistic, others less so.
Many people appear to think that life after four weeks of shutdown will just pick up where we left off. Not so. Different industries and businesses will be impacted in different ways. The degree of the likely impact is evidenced by the 12-week period of the wage subsidy being offered by the Government (despite [hopefully] only a four-week lockdown). Some economists are picking a long, drawn out recovery which will test the resolve of many business people.
The unfortunate reality is that not all business will survive, whilst others will flourish. If you are a business owner under lockdown, now is the perfect time to gather your thoughts and think of the possible future impacts on your business. History has shown that businesses that survive adverse events have taken positive steps to deal with whatever adversity is facing them. Businesses that have sat and watched the train coming inevitably got caught in the train wreck. Remember, hope is not a strategy.
Whilst you may not be able to directly influence the big picture, you need to maintain your focus on the important things you can control in your world i.e. customers, production, and people. The focus for the first few months is risk management of these, with cash flow being the key. Medium to long term, you will need to consider what fundamental changes have happened in the wider world and how this will impact on your world and your business going forward.
Below are some thoughts on things you may wish to consider. It is not exhaustive by any means but is designed to help kick-start the planning process.
Cash Flow is King
If you haven’t already, you need to prepare a cash flow forecast. It doesn’t need to be rocket science, you just need to work out what money is going to come in over the next few months and what is going to go out. Be realistic and err on the side of caution when estimating cash inflows. Stress test the forecast by further reducing sales and increasing the time it takes your clients to pay (debtor days). Having these different scenarios allows you to develop a more robust plan.
Keeping the business going requires active management of your “working capital” (the cash used in day to day operations of the business). Balancing stock on hand, bank overdraft, debtors and creditors is vital as these are the main components of your working capital. Many a good business has failed in the best of times by not managing working capital effectively. Options around this include debt factoring, extending creditor payment terms, offering discounts for early payment, running stock levels down etc. There is no magic answer, each business will be unique and different options will work best for each.
If forecast outgoings are greater than incoming cash, then you need to do something. Don’t sit there watching the train.
The starting point for preparing a cash flow forecast is your customers. Reviewing your customer base allows you to try and anticipate the likely impact on them of the shutdown. Whilst some are relatively easy to predict, others are less so as you also need to consider possible supply chain impacts. For example if a customer manufactures items with some component parts imported from overseas, the impact of Covid-19 on the country of origin (and freight) may also directly impact on the ability of the customer to continue manufacturing. Those customers that have contingency plans in place will no doubt find them being sorely tested.
You may also look at segmenting your customers by industry, age, gender etc. – whatever is relevant for your particular business. Segmenting your customers will provide you with a better overview of the likely impact the lockdown (and subsequent release) will have on them. This is obviously easier to do for some than others. The whole point here is you are trying to work out what your sales or income is going to be in an uncertain world.
Production – Manufacturing
On a go forward basis, you will need to ensure the continuity of your supply chain. This could involve having alternative suppliers in different countries or manufacturers based in New Zealand. You may also look at having increased stock reserves to carry you through any supply issues (or having your supplier carry them). Remember, no plan survives first contact with the enemy – make sure you stress test any proposed option.
Some traditional outsourcing models brought in to save costs e.g. manufacturing in China will now be thrown out after failing spectacularly. On the flipside, future manufacturing opportunities may arise in New Zealand in order to ensure supply chain security. It may cost more but people may pay the premium to ensure continuity.
However, at the end of the day there has to be a ready market for whatever you manufacture. Otherwise you will keep your staff fully employed manufacturing a stockpile which the liquidator will eventually need to dispose of. If you manufacture surgical masks, this will probably not be an issue in the short term. If you manufacture or import items to sell to tourists, you may wish to have a bit of a think.
As part of reviewing your business you may like to consider preparing a SWOT analysis. This stands for Strengths, Weaknesses, Opportunities and Threats. This technique assists you in considering these four aspects of your business and the results of that analysis allow you to plan accordingly.
The hard part here is you need to objectively consider these topics in respect of your business.
Once you’ve prepared your cash flow forecast and undertaken your SWOT analysis, you will hopefully have a clearer picture of what the future holds.
Short Term Cash Flow Assistance
If the future is positive but the business is going to suffer short term cash flow issues, then there are a number of options to assist with this. We briefly outline these below:
- Wage Subsidy
Available for employers to help retain staff, both full-time (> 20 hours per week) and part-time (< 20 hours per week). The subsidy is $585.80 for full-time staff and $350 for part-time staff and is paid as a lump sum for 12 weeks. We have covered this in more detail in a previous newsletter: Covid-19 Employer Update
However, of particular note is the compulsory requirement to retain employees for the period you receive the wage subsidy (12 weeks) and to use “best endeavours” to pay them a minimum of 80% of their normal income. If you can manage the 80% then that is fine. But paying 80% of their normal income for 12 weeks will quickly drain cash reserves, even with the wage subsidy. Some employers we have dealt with can see the edge of the cliff fast-approaching and will revert to only paying out the wage subsidy after the first month of paying 80%. This is a decision each employer needs to make and involves a multitude of different factors coming into play (average wages cost, staff loyalty, cash reserves available, lockdown expiry date etc.). There is also the option of offering staff the chance to top up to the 80% by using annual leave. Not an easy decision to make and we don’t judge those that make the hard call.
- Business Finance Guarantee Scheme
Under this scheme, businesses with turnover between $250,000 and $80 million can apply to their bank for loans of up to $500,000 to be repaid over a period of up to three years. As the Government is guaranteeing 80% of the risk to the banks, with the banks underwriting the remaining 20%, interest rates on these loans are expected to be relatively low. Banks will likely still require GSAs and personal guarantees (although each bank will have differing requirements).
- Extending Bank Overdraft Facilities
This will be a common option for many firms suffering short term cash flow issues. Normal bank lending criteria will apply and they will also likely ask for a cash flow forecast as part of the process.
- Switch long term loans to interest only
Again, this frees up short term cash flow.
- Loan deferral scheme
Although commonly called the mortgage holiday scheme, it isn’t. Banks can now offer to defer mortgage repayments of principal and interest for up to six months. It doesn’t make it go away, it merely defers the requirement to repay in the short term. The loan will still accrue interest so will take longer to repay. The main advantage of the scheme is that it frees up cash flow in the short term.
- Lease suspension
The Auckland District Law Society standard deed of lease includes a “no access in emergency” clause. Not all commercial leases have this clause but for those that do a fair portion of the rent and outgoings cease to be payable for the period that the premises have restricted access. A fair portion has not yet been defined and therefore this will need to be negotiated between landlords and tenants.
If you are asking the bank for finance they are going to want to know what you are doing to mitigate the risk and improve your financial position. If the issues extend beyond short term cash flow then you will have to consider further measures. If your (once beautiful) baby is now ugly but you are in denial, your bank manager is going to tell you.
The key message here is that you need to cut your coat to suit your cloth. If the plan reveals that you are going to struggle longer term then you need to adapt accordingly. Restructuring will be required to survive the new economic conditions. This could involve slimming down the business, divesting unprofitable customers/markets or merging with another business. It could also involve looking at technology to save on labour costs or improve efficiencies.
Whilst staff may have thought initially that life will return to normal after lockdown, many are starting to realise that there will be wider economic ramifications. If sales are significantly down it will be no real surprise to staff that significant change is required. Being up front with staff as much as possible about what is required and why may provide some other ideas to help.
Restructuring may also require redundancies. This, albeit unpalatable, task may be necessary for the business to survive. If it is required, go early and go hard. A long drawn out process is painful for everyone and cripples the business with staff wondering “who next?” You need to clearly identify where the surpluses are staff-wise and plan for how the redundancies are to be undertaken (criteria, process etc.). There will be less overall negative impact if you do multiple redundancies at once, instead of a gradual reduction of staff by redundancy over time. You will also need to consider wage subsidy obligations around how long you need to keep staff on for, what union consultation is required (if applicable) and review clauses in employment contracts re notice period, process etc. Given the minefield of possible issues with any restructuring, seek professional help.
If the world has changed that much then the only option may be winding up the business. This is obviously the last resort after you have canvassed the alternatives. However, don’t bleed out after suffering death by a thousand cuts. Seek help, address the issues and act. Don’t watch the train.
The road ahead is uncertain and many businesses will not survive. Those that identify opportunities and adapt quickly will fair better than those that sit and watch the train. Although making the required changes will require business owners to be brave and resilient, new opportunities will also arise that can be exploited.
Make sure you have people to discuss options and issues with. Having a sounding board helps you clarify your own thoughts and provides a reality check. However, given the uncertainties, don’t be too hard on yourself if some initiatives don’t pay off. As they say, in life you get the test first and then the lesson afterwards. No doubt this will prove to be one hell of a test.