Coronavirus (COVID-19) is a once in a 100-year event with a sudden and significant impact, prompting a financial crisis in markets and businesses across the world. The global nature of the crisis means that supply chains are disrupted, while revenue in many industries has collapsed.
Australian businesses across every sector of the economy are being severely impacted with urgent action required to proactively mitigate operational and financial risks.
Cash flow forecasting
- Review (and re-review) current trading budgets. Budgets and forecasts will quickly become out of date in the current environment. Re-forecast regularly taking account of supply chain constraints, revenue impacts, exchange rates and headcount.
- Prepare an assumption driven, integrated three-way financial model. Carefully review and test all assumptions and undertake extensive scenario analysis focused on downside exposures. Integrated models can easily be updated on changing assumptions, making them ideal tools for uncertain times.
- Model the impact of Federal and State Government assistance such as the $6.7bn to “Boost Cash Flow for Employers” by up to $100,000 for businesses with a turnover of less than $50m. Also, consider state-based relief such as PAYG and payroll tax concessions.
- Review cost base. Understand fixed and variable costs and model scenarios to test flexibility.
- Employee obligations. Model staff costs in detail to identify any flexibility in employment costs.
- Assess forecast cash flow on a daily basis. Carefully monitor daily cash receipts and payments and re-forecast accordingly.
- Review facility headroom. Use the three-way financial model to stress test banking covenants and headroom under downsize scenarios.
- Know your working capital cycle. The working capital requirement for businesses with high seasonal sales is likely to vary significantly from peak to trough.
- Assess working capital on a weekly, if not daily basis. Timing of payroll runs and supplier payments can create significant demands on intraday working capital and cash flow during times of liquidity strain.
- Review your customer base and engage with customers:
- Consistently review the profile of your aged debtors and follow up on overdue debts regularly.
- Understand the financial pressure points experienced by customers.
- Implement payment plans where appropriate to maintain a level of cash flow.
- Communicate with customers if supply issues are envisaged.
- Engage with key suppliers. Identify potential exposures with critical suppliers to understand their ability to maintain supply. Consider re-negotiating supply agreements to remove personal exposure from existing personal guarantees or other security.
- Identify alternative suppliers. Identify which of your key suppliers may be exposed and consider scenarios where supply is disrupted. Seek out alternative suppliers but be wary of personal exposure such as personal guarantees or security before signing new supply agreements.
- Review your loan documents. Understand key terms, covenants and flexibility in your banking facilities.
- Tax refunds. Tax payers expecting tax refunds including R&D refunds should lodge their returns as soon as possible.
- Lodgement extension. If you need more time to lodge returns, you need to ask your tax agent to lodge an extension of time to lodge.
- Payment plans. Engage with the ATO to defer any tax payments.
- SME stimulus measures. SMEs with an annual turnover of less than $50m (based on prior years) will receive 100% of PAYG withheld on employees wages up to $50,000 in 2020, and $50,000 in 2021. The ATO will deliver this payment through the BAS, starting with those due on 28 April 2020.
- Increasing instant asset write off. Eligible businesses will be able to immediately deduct the cost of eligible assets costing less than $150,000 on assets installed before 30 June 2020. Access to this concession is available for businesses with a turnover of less than $500m. The concession will apply to new and second-hand assets, but not all assets will qualify.
- Business incentive. As well as the above, businesses will be allowed accelerated 50% depreciation in addition to existing depreciation. This applies only to new assets acquired after 12 March 2020 and installed before 30 June 2021. This is only available to businesses with an aggregated turnover of less than $500m.
- Superannuation. Individuals will be allowed to access up to $10,000 of superannuation savings in 2019/20 and $10,000 in 2020/21. This will be available where individuals are made redundant, have working hours reduced by 20% or they are sole traders and their business has a reduction in turnover by 20% or more.
- Payroll tax concessions. Each of the States have introduced concessions, including grants and refunds, in regards to payroll tax. Make sure you are aware of the concessions available in your State. View each of the States concessions here.
Restructuring and directors liability
- Creditors. The Federal Government is temporarily increasing the current minimum threshold for creditors issuing a statutory demand from $2,000 to $20,000. This will apply for six months. The statutory timeframe for a company to respond to a statutory demand will be extended temporarily from 21 days to six months. This will apply for six months. The time a debtor has to respond to a bankruptcy notice will be temporarily increased from 21 days to six months.
- Directors liability. The Government has announced there will be temporary relief for Directors from any personal liability for trading while insolvent.
- Temporary changes. It should be noted these measures are temporary and they will be unwound.
- Act early to seek out additional sources of equity and/or debt finance but be wary of personal exposure. Engage existing major shareholders and alternative external providers of capital but be wary of excessive financing costs and consider the personal exposure implications of providing personal security.
- Communicate with your debt provider. Major Australian banks are implementing a range of measures to assist customers including suspension of loan payments and access to additional credit (subject to approval). Early engagement with your bank is vital.
- Communicate with statutory bodies. State and Federal statutory authorities are also implementing a range of measures to assist taxpayers that meet certain criteria including payment deferrals, payment plans and activity statement credits.
- Stay on top of reporting obligations. It is imperative that businesses maintain reporting obligations to the ATO in relation to GST, superannuation and PAYG. If reporting obligations have been maintained and a director penalty notice is issued, the Director(s) will still have the option of appointing an external administrator to avoid personal liability if their company cannot pay the debt. If reporting obligations have not been maintained, the only option is for the company to pay the debt.
- Act quickly to access available Government assistance such as wage subsidies for apprentices and trainees or other state-based programs.
- Act quickly to access tax concessions. Make sure your business qualifies for the tax concessions and you access these as soon as possible. This may require you to lodge tax returns and BASs before the due dates.
RSM can move quickly to support your business including cash flow modelling, working capital reviews, debt advisory, negotiations and renegotiations, restructuring and assistance to access government and bank relief programs.
For more information on this article, please contact your local RSM office.