The King is back… Cash that is

The coronavirus (COVID-19) outbreak is tragic for the thousands affected. To date, we have managed things well in Australia, but you may have noticed that the media has recently been focusing on the economic impact of the pandemic. No doubt there is some underlying harm being caused to the economy, and the real impact of this is only just starting to emerge.

At Banks Group, we have been speaking to our clients. Some are very uncertain and scared, while others are going stronger than ever. It has become very obvious to us that ‘the King’ is making a comeback, as it did during the GFC: CASH is back.

Cash is the difference between money out and money in.

Cash and headroom (i.e. undrawn finance balances) will quickly become critical, in situations where operations and output are impacted while staff and establishment outgoings remain fixed. This is also referred to as liquidity, meaning a business has access to cash at short notice.

Businesses should review all assumptions that feed into their cash flow projections and run a number of scenarios on profit and loss, balance sheet and cash flows; these should show different degrees of interruption to business operations. It is important that this is kept up to date as information evolves, and any triggers relating to liquidity risk must be identified.

Depending on reserve levels and how exposed your specific industry sector may be, businesses may need to consider matters such as expanding debt facilities with their lenders, postponing large financial outgoings, anticipating covenant problems, and making arrangements with suppliers and landlords to extend credit. We have outlined a few methods below.

Manage Debtors (Accounts Receivable)

Managing your debtors during the COVID-19 outbreak is vital, especially with the increasing reluctance for businesses and individual consumers to part with their cash.

Some ways you can improve your debtor position include:

  • Issue invoices to your customers at the first opportunity (including interim billing), and monitor them closely;
  • Review your aged debtors report on a regular basis, perhaps even daily, in order to identify when your customers have gone outside their aged credit terms;
  • Institute a cash on delivery policy for slow-paying customers, rather than refusing to do business with them at all;
  • Ask your customers to make deposits at the time orders are taken, especially new customers;
  • Offer discounts to your customers for early payment of invoices.
  • Very importantly, speak to your bank to see if they have other transactional account offerings that may better suit your current business needs. From late March, Australia’s major banks started offering $250,000 loans to small and medium-sized businesses, where no repayments are required for six months. These loans are unsecured and are 50% guaranteed by the Federal Government, and no interest will be charged unless the money is actually used.

Create Business Income

Think about how your business may be able to adapt, creating other income streams that can bring in cash.

Some examples are:

  • Restaurants offering takeaway food and groceries for pick up and delivery;
  • Manufacturers of alcohol products switching to make hand sanitiser.

Control Expenses

Managing your expenses is as important as managing revenue. It is essential to use a rolling forecast or budget, perhaps even on a daily basis – this will help you identify unexpected or unnecessary expenses.

Ways to control your expenses include:

  • Request quotes for any major expense items (in order to avoid unnecessary surprises). Don’t always focus on choosing the lowest price – sometimes flexible payment terms can improve your cash flow more effectively;
  • Seek fixed costs from suppliers if possible, which will give you greater certainty on your cash flows;
  • Undertake a full a line-by-line review of both your fixed and variable expenses, then
    • Cut out or put on hold all unnecessary expenses.
    • Identify those that can be negotiated with suppliers to be postponed, reduced, deferred etc.
  • Occupancy Costs – a new code of conduct has just been put in place for guidance on landlord and tenant dealings. Click here for the Commercial Rent code, and follow the guidelines to help you to negotiate with your landlord during this period;
  • Allow your staff to participate and raise concerns, and listen to what they have to say. Talk to your business partners, staff and family to see if there are other areas of your business where you can cut expenses.

Manage the timing of your cash outflows

You could also improve your cash outflow timing as follows:

  • Take advantage of your credit terms. For example, pay your creditors on the date the invoice is due, rather than early;
  • Otherwise, negotiate a discount with suppliers for invoices paid upfront or early, if possible;
  • Reach out to your suppliers to see if you can extend your payment terms, or enter into a payment plan if cash flow is tight. The sooner you reach out the better – you will need their trust and understanding;
  • Discuss the situation with professional service providers – for example, insurance brokers offer invoice funding so you can have up to 12 months to pay your bill. Banks Group offers similar funding via our provider FeeSynergy.

Tax Obligations

While it is important to make provision for tax obligations, there are opportunities to reduce PAYG payable on 28 April for Quarter 3 (January–March) as well as Quarter 4 (April-June) in due course. Please check the arrangements with us, having regard to the current economic impact of COVID-19 on your business profits.

Furthermore, please talk to us about the Australian Taxation Office (ATO) guidelines on deferring tax payments due, potentially up to 6 months, and perhaps having ATO penalties and interest waived.

Insurances

Look into your business insurances to see what options you may have with business interruption cover.

Government Incentives

  • You should also check with us to see if you are eligible for any cash or tax incentives under the economic stimulus packages. Some of the relief relating to businesses include tax-free PAYG Tax Credits from the ATO of up to $100,000 for most not-for-profits and small businesses (with a turnover under $50 million), to help them retain staff and continue operating;
  • If your payroll is under $3 million and you have been paying Payroll Tax in Victoria, the whole year’s tax will be refunded by the State Revenue Office (SRO). Apply online via the SRO website;
  • Apply for the Victorian Government’s $10,000 small business grant (click here for further details);
  • Refer to our recent bulletins for more information on new Government measures:
  • Stay close to your accountant and ask questions. Understand how the ATO is supporting businesses experiencing difficulties with tax obligations because of COVID-19. It is likely that the ATO will have announcements in the future with further assistance. As we have seen, things are changing, sometimes by the hour, so take the time to review announcements and communications from us.

Finance

  • Apply to your Bank for immediate 6 months interest and repayment deferral if needed;
  • Apply for a small business semi-government guaranteed bank loan for up to $250,000;
  • Banks are allowing small businesses to obtain short-term funding to cover JobKeeper shortfalls and timing;
  • Click here to review recently announced bank concessions.

Supply Chain

Businesses need to examine their operations, and review upstream and downstream to identify where the vulnerabilities are. The impact on supply chains has been highlighted by the shut-down in China, and some of that impact on businesses is yet to be felt due to lead times and levels of component stocks. Businesses should factor in contingencies around their specific supply chain, particularly for seasonal stock.

During these times, when there is so much going on, we strongly recommend you keep a record of all important documents and announcements in addition to usual business documentation. Make note of all important calls and actions that require follow up.

We will of course continue to monitor any developments in this space and keep you up to date. Our team is proactive, but we will be glad to help if you pick up the phone or email us.

In supporting our partners and clients during these testing times, both existing and new, our Corporate Finance team is offering reviews to identify strengths, weaknesses, opportunities and threats for your business. So please do not hesitate to reach out to us if you would like to know more.

Talk to us…

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Financial Planning Services provided as an authorised representative of Count Financial Limited ABN 19 001 974 625 Australian Financial Services Licence Holder Number 227232 a wholly-owned, non-guaranteed subsidiary of Commonwealth Bank of Australia ABN 48 123 123 124. Count is a Professional Partner of the Financial Planning Association of Australia Limited. Count advisers are authorised representatives of Count. www.count.com.au

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