Cash is king, now more than ever
Are you worried about how long your business can survive in the current climate? Are you reliant on government assistance packages?
Many company boards will be facing liquidity challenges this year that are unprecedented in recent times, and for which new approaches to business are required. Governments have temporarily suspended director insolvent trading obligations and provided various business assistance packages. This has given directors some comfort on their obligations and assisted to keep their businesses afloat.
However, the question remains for how long can businesses survive in the current climate and what needs to be addressed to meet the challenges that will arise as this assistance is withdrawn? In this article, we address two elements that are key – managing your cash and managing your creditors well.
End of COVID-19 support mechanisms
As we approach September, Federal Government has some important decisions to make about certain COVID-19 support mechanisms and in particular, whether to allow them to end, whether to extend them, or whether to provide transitional relief in specific circumstances. The government support packages, director duty moratoriums and extended debt recovery / payment measures that are due to come to an end include:
– JobKeeper wage subsidy in its current form, to be scaled back from September 2020 and expire in March 2021 with a need to demonstrate the relevant decline in turnover on an ongoing basis for the relevant quarters;
– ATO tax relief and deferment;
– Bank loan repayment deferment period;
– Statutory demand extended period and threshold amount;
– Director insolvent trading obligation, for debts incurred in the ordinary course of business;
– Commercial tenancy Code of Conduct relief.
Whilst these measures have undoubtedly saved many businesses from going under from the immediate impact of COVID-19, there is a real concern that their currently planned expiry dates may open the insolvency flood gates.
This being so, as a director, advisor or key stakeholder to a business which is adversely impacted by COVID-19 and reliant on these measures, it is critical that you are acting now to secure the ongoing viability of your business. Whilst any extension might be welcome relief, if granted, the focus must be on strengthening your business now.
Cash is king
This saying has always been true, no more so than now.
First and foremost, directors and senior executives, need to have a high degree of discipline and visibility over their expected future cash flows. That is, there needs to be an estimate of what is coming in and what is going out daily, projected forward on a rolling basis for 13 weeks. This forecast should be reviewed at least once a week (and more frequently if cash is very tight), reviewing the actuals to the forecast and updating the forecast based on new information. Once the 13 week rolling cash flow forecast is bedded down, extend it out for 6 months, to give you both the near term and medium term view.
In simple terms, understanding your cash position allows you to:
– manage what’s in front of you;
– identify how much money you have to spend;
– identify how much money you need to raise and by when;
– identify where to spend the money, and where to stop spending the money.
Although this sounds obvious, many businesses don’t do it. This is because in boom times, the focus tends to be on the P&L. Looking to the cash involves a different approach and it involves preparing data in a new way, at the very point in time when businesses feel constrained. It is this different approach however, that is required now.
Looking forward 13 weeks gives you enough time to put in place short-term initiatives to manage dips in the cash flow and still be relatively accurate over the forecast period. Looking forward 6 months can be more difficult to do, particularly in the current climate. However, it is critical in terms of profiling anticipated return to normalised revenues, the repayment of debts which have been deferred, and for predicting any sustained cash shortfall for which time is needed to implement a solution. Be as realistic as you can – don’t sand bag the data, don’t gap fill negative cash dips with blue sky, do be conservatively realistic on the incomings and do be sure to account for all anticipated outgoings. The aim is not to avoid negative cash flow, but to highlight any potential issues with sufficient time to put in place a plan.
If a conservatively realistic cash flow forecast concerns you, then it is critical to also have in place your Safe Harbour framework, to protect both the directors and the company.
Finally, whoever is responsible for the cash flow forecast – give them the time they need to do it well. Don’t short-change yourself on this aspect of the business. What you spend in resourcing a robust cash flow will be more than offset in the visibility that you obtain over your business, and the avoidance of potential disruption from a poorly managed cash flow and the flow on effects.
A key element of managing cash flow and a successful turnaround plan, is the proper management of creditors to gain their trust and support. Trust and support is gained by:
– open and transparent dialogue;
– agreeing realistic plans that you can commit to; and
– sticking to the plan.
If there is reason to vary the plan, then again, it is open and transparent dialogue ahead of any breach, that retains the trust and support of the creditor pool. Do not avoid the difficult conversation. Silence will almost certainly lead to more aggressive recovery action. Creditors understand that businesses are finding it tough just now to pay all debts within terms. Creditors do however want to know what can be paid by when, including to manage their own situation. On the flipside, the prudent board will want to know that any debts that cannot be paid within usual terms, are subject to agreed payment plans.
Boards need to be very conscious that come 25 September 2020, absent any extension, the COVID-19 statutory demand relief comes to an end. Companies must have a supportive creditor pool and agreed payment plans secured within the next month or so, to ensure that 25 September 2020 is not a trigger date for a barrage of statutory demands.
Managing your creditors well does require time; you need to speak with each creditor about your situation and agree a plan that works, having regard to what your cash flow forecast indicates you can afford to pay and when. Without a robust cash flow, you will find it difficult to come to any sensible arrangement – as you simply won’t have the visibility you need to inform the terms. Likewise, you will agree arrangements that in fact, you can’t meet, resulting in breaches and further damaging the creditor relationship.
One of your most important stakeholders is likely to be your bank. Our comments about honest transparent communications with creditors, are of course true for your bank. Frequent quality communication with your bank ensures that they understand your position, making conversations about any ongoing support that you may need both quicker and easier. It is very common for business owners to be unsure about how to approach their bank, thinking the worst. However, in our experience, the opposite is true. If you are adversely affected and struggling through this crisis, the bank almost certainly, already knows that. As such, in fact a frank discussion will be welcome by the banker, because now, the parties can work together to try and find a way forward.
If you haven’t already done so, then we recommend that you organise a meeting with your bank to talk about your situation, being sure to provide them with:
– your 13-week rolling cash flow forecast;
– if you have it, the 6-month forecast that shows them you are thinking about how to get through to the end of the year and a brief explanation of the underlying assumptions;
– a summary of the initiatives that you have been and are putting in place to get your business through this period; and
– if you need something specific of the bank, a clear ‘ask’ – think about what you need the bank to agree to and articulate it clearly. If you are asking for additional financial support, point them to the cash flow in terms of the amount that you need, by when and how you plan to repay it.
Having these conversations early and before the end of any loan repayment holiday or breach is key. This will give you time to consider any requests from the bank (e.g. for more information), any limits the bank may have in supporting you and if necessary, time to consider alternative options.
Get your compliance in order
The perfect time to ensure that you are compliant is now, whilst the government support packages remain on foot. Your compliance checklist should include the following:
– Do you have good visibility over your cash flow?
– Do you have payment plans for all creditors not paid within terms, agreed in writing?
– Are you meeting all your tax lodgement obligations?
– Are you paying all employee amounts due on time?
– Do you have quality financial records, are you keeping appropriately informed about the financial position and are there processes in place to ensure there is no misconduct that might adversely skew the financial information that you are getting?
– If you are struggling financially, do you have appropriate expert advisers assisting you to find a way through?
For more information on the COVID-19 insolvent trading relief and why the Safe Harbour framework remains best practice governance to see you through these next months, we refer you to our article COVID-19 Insolvent Trading Relief.
When liquidity is managed well, business is given the best possible chance of securing stability, leading to profitability and ultimately, sustainability. A focus on the cash empowers you to make informed decisions. In turn, informed decision making gives back control, alleviates stress and confusion, and focuses your attention where it is needed most.
If you would like further information about how to instil a strong cash flow culture in your organisation, how to secure the support of your creditors and key stakeholders such as your bank, the COVID-19 insolvent trading and statutory demand relief, Safe Harbour, working through complex business challenges or improving business performance, please contact us (details below).