Planning for the worst - what happens when the stimulus runs out?

Businesses who are currently in receipt of stimulus payments have less than three months to get their cashflow in order.

As things stand:
 
  • the cash flow boost (CFB) will be delivered on lodgement of your business activity statements (BAS) between July-September if your business received the first tranche of the CFB payments between March 2020-June 2020
  • the last JobKeeper fortnight will end on 27 September 2020 – the Government are currently reviewing the program – but at this stage no detail has been provided in relation to the changes (if any)
The six-month loan repayments deferral afforded by banks will also end on September 2020. However, the Australian Banking Association recently announced that banks will be assisting business customers on a case by case basis by providing a further four-month deferral extension post September 2020. The extension is not automatic and will be in place to assist those businesses who genuinely need it. We are well placed to assist in these negotiations and discussions with your bank
 
Hope for the best and plan for the worst
With the start of the new financial year, it would be prudent to set up forecasts for the coming months to ensure your business can stand on its own feet once the financial assistance payments stop.

A three-way forecast incorporates a forecast of the profit and loss, cash flow and balance sheet and is used by many businesses in their ongoing annual budgeting processes. Good forecasting can also provide a holistic view of the impact any changes will have on the business’ bottom line by testing various scenarios.

The long term effects of COVID-19 are still not quite clear and it is necessary to consider worst-case scenarios and plan for events which you may not necessarily have control over such as major customers going out of business or delays in your supply chain due to suppliers facing financial difficulty.

Cash flow and Jobkeeper
Since the JobKeeper Program is scheduled to end in less than three months, it is necessary to consider whether you have sufficient cash inflows to fund your payroll from October onwards. If cash inflows are insufficient, consider what options are available and whether any temporary funding may be required from banks. Please note, the Government are still supporting businesses by providing 50% guarantees on new business loans (maximum loan amounts of $250,000) for small businesses.

In circumstances where you cannot afford staff long-term, you will need to consider whether it would be appropriate laying off non-essential staff. This may be an expensive exercise and it is critical to know how it will hit your pocket if you need to pay out entitlements on termination (e.g. leave, redundancy etc.).

There may be options available to plan for these entitlements over the next few months. For example, under the temporary provisions added to the Fair Work Act, there may be options to request employees to take leave under certain circumstances whilst in receipt of JobKeeper. Further legal advice may be required in relation to this and termination/redundancy entitlements.

Reducing the break-even
Whilst the tendency for most businesses at this stage would be to reduce prices to boost income, the impact of this on the business’ break-even point (BEP) could be significant. As a starting point, an analysis is required on the current BEP of the business - the level at which revenue exceeds your total costs ( i.e. not running at a loss).

Once this is determined, consider the BEP of a certain product/division and decide whether it is necessary to cease any unprofitable areas which are contributing heavily towards the costs of the organisation without contribution enough revenue to support the product/division. Most businesses would have an idea of the level of revenue they need to maintain to cover costs, however, our experience shows that this is done on an organisational basis “as a whole” and is not drilled down to a divisional/product level.

Cutting overheads
Prior to making any decisions on cutting down on products/divisions, it's also crucial to do a detailed review of all your overhead expenses and consider any cost-cutting options available. Rental assistance may be available from your landlords which comes in the form of rental waivers and deferrals during COVID-19 affected periods (30 March 2020–29 September 2020).

Each State has implemented the principles laid out by the National Cabinet and if you are in receipt of JobKeeper, this should be investigated further if you are not already getting this assistance. Furthermore, to support businesses and landlords, independent third parties can act as mediators who can assist in having these discussions and tailoring solutions to suit both parties. Note, depending on the State, these requests can be backdated to 30 March 2020.

Next up, consider the non-essential expenses in your profit and loss statement and start cutting down on all luxury expenses. Restrict travel/transport budgets, entertainment expenses, staff amenities and unnecessary capital equipment. Redeploy these funds towards areas that would help your business grow (e.g. advertising and marketing/website and IT).

How can we help
The next three months are critical for long-term business survival and whilst the stimulus payments have been crucial, businesses need to plan for the long term and monitor their cash flow on an ongoing basis taking into account any variances between actual results and forecasted numbers.

Through us, you have access to advisors and forecasting solutions to assist in the preparation of robust forecasts tailored to your circumstances.

Contact your Moore Australia advisor today if you would like to discuss this in further detail.