What happens when business stops

Is your business prepared?

Whether it is due to changes in government policy, economic shocks, industry downturns, or other external forces, the impact on a business can be sudden, far-reaching and destabilising. It can happen to any business, and every business should be prepared.

In 2020, we saw the impact of a global pandemic: borders closed overnight, business told they could no longer open, jobs lost in an instant. In WA, we have seen (and are seeing) significant policy change across a number of industries, and regardless of what side of the fence you sit, this is the reality facing WA businesses. It may be confronting, but every business leader should ask themselves an important question: What will you do if it happens to you? Are you prepared?

Revenue falls, costs don’t

When a business’ trading operations are impacted, whatever the circumstance may be, revenue often drops overnight but expenses do not. Fixed commitments such as rent, finance repayments, wages, subscriptions, and tax obligations continue. In the tourism and hospitality sector, we know business is often driven by seasonal demand. A sudden stop in revenue at a time where cash collections should be at its highest can cripple a business.

How to prepare your business for the worst

For business owners, this moment in time is crucial. The first step in preparing for the worst is understanding your true position. For example, how much cash do you have, what are your financial commitments - both short and long-term. How long can your business survive without income? As the saying goes – “if you fail to plan; you plan to fail.”

Good business hygiene will help you gain a better understanding of your business position. Have a cashflow budget, have up to date accounting systems, booking systems, inventory management systems. Knowing what you have and what you need can give you direction in a time of uncertainty.

Of course, there is more to business than figures on a page. Your people are an integral part of your business, and they are often the hardest issue to navigate.

If trading is impacted or even ceases, staffing quickly becomes a key challenge. You will face decisions with your staff that may include:

• Standing down employees
• Reducing hours
• Redundancies

It isn’t pleasant, but it could be reality. Depending on the cause of the shutdown, governments may offer compensation packages or stimulus payments, as they did with JobKeeper. These can help but consider that there could be delays or the payments may be insufficient.

Review your business structure

Sometimes, an unforeseen event  exposes that a structure which once worked is no longer appropriate. That doesn’t mean your business needs to end. However, it may indicate that it’s time for a restructure.

Asset protection

What asset protection structures have you put in place to grow your personal wealth whilst also protecting you from the risks of operating a business? 

Asset protection strategies can assist in preventing the loss of personal assets as a result of unforeseen events. Those who prepare before going into business or while business is going well will have an advantage.

Restructuring

If you have prepared well, you will have the information available that shows whether your business is facing a ‘bump in the road’ or a serious event that may affect the ongoing viability of the business. This allows you to respond accordingly.

If ongoing viability is a concern, consider restructuring your business. There are many ways to restructure a business, including:

• Assess the current structure
  • Is the existing business structure still fit for purpose?
• Enhance asset protection
  • Separate trading activities from assets
  • Could the use of trusts or holding companies add another layer of protection?
• If additional capital is needed, explore whether new share classes can be created, bringing in new investors, or forming joint ventures.
• Realignment of core operations
• Has the business moved too far away from the core service or product which made it successful? Non-core operations may need to be outsourced or ceased.
• Streamline processes to reduce overheads and improve cash flow.
• Review and renegotiate commitments
  • Renegotiate terms with suppliers, landlords and financiers to improve cash flow and reduce fixed costs.

If your business is faced with some uncertainties, seeking the early advice of your trusted adviser is recommended so any restructuring tools can be implemented to try and protect the ongoing viability of the business.

Prepare now, seek support

A sudden stop to your business’ trading operations could be a  dire situation Even if you are not directly affected by an economy-wide challenge, your suppliers or customers may be. The flow on effect can have just as much an impact on your business as a direct cease in trading would. It is naïve to think your business is bulletproof.

The lesson to draw from this is that preparation is key, but professional support is a lifeline. Even the best prepared can have the wind taken from their sails should the unexpected happen. If you have prepared, remember to trust your systems, trust your plan, and trust your process.

Ask yourself these three questions:

Where are you now?

• Current cash position
• Liabilities and fixed costs
• Stock and supplier commitments

What can you do?

• Renegotiate terms
• Reduce overheads
• Review staffing
• Consider financing options

Do you need to change?

• Is the current entity appropriate?
• Would a restructure strengthen resilience?

FOR MORE INFORMATION

If you are concerned that your business may not be prepared to deal with an unforeseen event, now is the time to act. Reach out to your local RSM adviser today.