The economic impact of COVID-19 remains to be seen, and while restrictions are starting to lift, it is unlikely that things will go back to business as usual for some time. In these difficult economic times, business survival should be your focus. The key to survival is to improve your cash flow position. You can do this by maximising the cash you are receiving (inflows) and minimising the cash you are spending (outflows). This article will provide some guidance on immediate actions you can take to protect your business.
Increasing Your Inflows of Cash
Increasing the income coming into your business is necessary for maintaining its survival. There are a number of ways that you can increase your inflows of cash.
1. Collect Any Receivables
The natural first step to improving your cash flow position is to collect all money which your customers owe when the payments are due. If your customer refuses to pay in accordance with the contract, they will be in breach of it, and it is open to you to collect the debt and enforce the contract against them.
You might want to consider:
- what amounts are due;
- when they are due; and
- what your options are in the event that your customer does not pay.
2. Claim Any Government Support
Another way to protect your business is by ensuring you are claiming any government that is available to your business.
For example, the Federal Parliament legislated a wage subsidy for businesses known as 'JobKeeper'. You could be eligible for JobKeeper if you are a business that has suffered a 30% or more reduction in turnover compared to last year (50% for large businesses). If eligible, you could be entitled to receive $1,500 per fortnight per eligible employee, to help you retain employees that you would otherwise have had to make redundant.
To receive JobKeeper, you will need to work with your employees to register your interest with the Australian Tax Office.
Various other forms of government support have also been announced which you may be eligible for. This includes:
- significant wage subsidies in relation to apprentices;
- PAYG cashbacks;
- increased capital asset write-offs; and
- deferrals or reductions in various payments made through business activity statements.
3. Confirm Insurance Coverage
You may be insured against business continuity interruption. If you think this may be the case, you should call your insurer to discuss your options and find out what you might be entitled to.
4. Consider Your Loan and Financing Options
Earlier this year, the Australian Banking Association announced a relief package to improve cash flow in small businesses that are being impacted by COVID-19. How the banks have responded to these measures differ from bank to bank. You should ask your lender how you might benefit from the relief package.
Decreasing Your Outflows of Cash
When making changes for the survival of your business, you should look for ways to reduce your spending. Here, there are a number of options you should consider.
Suggestions for how to decrease your outflows of cash:
1. Reduce Your Payroll Expenses
Payroll expenses can be one of the biggest expenses for a small business. When reducing your outflows of cash, this may be the best place to start. There are a number of different ways that you may be able to reduce your payroll expenses, including:
- making employees redundant;
- standing down employees without pay;
- reducing the number of hours that your employees work; and
- requesting your employees accept a temporary pay reduction or take annual leave.
Whether you will be able to exercise any of the above options will depend on your (and your employee's) circumstances. Make sure to exercise caution when taking these steps. If you take an action that you do not have the right to exercise, you could face substantial penalties and back pay claims. Here, you need to consider:
- what payroll reduction options are open to you;
- potential consequences of exercising any options;
- how to engage new employees to provide flexibility going forward;
- how to manage your existing employees; and
- ensuring you are complying with your legal obligations in relation to those employees.
2. Renegotiate Your Property Leasing Arrangements
Another considerable overhead, which you may not currently be getting the benefit of with your employees working from home, is your lease. As landlords are under pressure to keep their tenants, tenants are in a strong bargaining position. As such, you should contact your landlord or agent to discuss how to reduce rental payments in the short term.
Options that may be available to you include:
- a temporary rent reduction;
- deferring rent payments; or
- a combination of the above.
If there are tenants in your building that may be facing a similar situation, it may be worth checking with them to see how they have managed their situation. You might get a better deal if you approach the agent or landlord together.
In early April, the government proposed a code of conduct requiring landlords provide temporary rent relief to commercial tenants who are experiencing financial stress due to COVID-19. If legislated in your state or territory, the code of conduct forms a minimum standard from which you can negotiate. Here, you should consider:
- what contractual levers are available to you to secure rent relief;
- what you actually want out of any negotiation with your agent or landlord; and
- the potential consequences of breaching your lease and how likely these are to be exercised.
3. Reach Out to Your Lenders
Once you have spoken to your agent or landlord, it is also worth reaching out to your lender to see their flexibility on your existing finance arrangements. As lenders want the best possible chance of being repaid in full, you may be able to:
- extend the date on which the loan amount is due and either pause or spread out repayments;
- secure a temporary break from monthly interest repayments; or
- renegotiate or secure temporary relief from your financial covenants.
Financial covenants are promises you might make when securing a loan. They can include ensuring that a certain cash balance is maintained or that the value of the securing asset remains above a certain value.
Another option you have when negotiating with your lenders is renegotiating or obtaining a release from representations and warranties. Representations and warranties are statements you would have made to secure your loan. If a representation or warranty is proven to be untrue, you will likely be in default of the loan agreement.
You should also secure consent to, within an agreed period, not meet a particular undertaking. An 'undertaking' is a promise to do something or not do something. If you make an undertaking but are unable to keep it, you will likely be in breach of the loan agreement.
Ultimately, you should renegotiate what constitutes an event of default and the consequences of one occurring. An 'event of default' is a serious event which, if it occurs, indicates that you may not be able to repay the loan. If an event of default occurs, you could face a number of serious consequences.
4. Assess Supplier Contracts
It is likely that you have entered into a whole range of contracts to have things supplied to you. These contractual commitments could amount to a large cash outflow, so you should consider:
- assessing what outgoing cashflows you have contractually committed to; and
- renegotiating the contracts you could have better terms on; or
- terminating the contracts that you no longer need.
When communicating with your suppliers, be careful not to suggest you are unwilling to perform your obligations under the agreement. Saying this could have serious consequences, depending on the terms of your contract.
We recommend that you also check your contracts to see whether you have adequate contractual protections to deal with the impact of COVID-19.
For example, you should check to see whether your contract has a force majeure clause. This clause could be useful for managing your obligations during COVID-19. Where you do not have adequate protections in place, you could try and negotiate these in. You should also keep these improvements in mind for new contracts.
Key Takeaways
If you are looking to best protect your business from the impact of COVID-19, a great first step in managing your inflows and outflows. By doing so, you will better be able to manage your cash flow in a way which will see your business through this difficult period.
Originally published May 26, 2020
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
