Insights

How is COVID-19 affecting Australian businesses and is there worse to come?


Based on our recent survey:

  • 41% of businesses have been significantly impacted by COVID-19
  • Around two-thirds of businesses have been able to manage the effects of the crisis internally
  • 31% of respondents believe that the ASX will not bottom out until at least September 2020
  • Most respondents are satisfied with the measures put in place by the Federal Government during the COVID-19 crisis. Three-quarters of respondents think that health measures were put in place at about the right time. Two-thirds think that the financial measures taken (e.g. JobKeeper) are about right, as opposed to being too much or too little.
  • The top 4 initiatives to survive the ‘hibernation period’ have been:
    • Government incentives, such as JobKeeper, Cash Boost and payroll tax waivers (76%)
    • Financial and cash flow modelling (72%)
    • Business changes to protect health of staff, customers, and suppliers (72%)
    • Conserving cash by minimising and deferring expenditure (66%)
  • Most respondents are not concerned about their business surviving the hibernation period (79%) or about their ability to reboot their business when business starts to return to the new normal (83%).
  • Only 1 in 5 Executive Teams are spending more than 65% of their time managing the impact of this crisis
  • The impact of COVID-19 on business revenue, gross profit, and cash receipts is highly varied.
  • Only 28% of respondents thought they could survive a ‘hibernation period’ for more than 12 months with the current level of Government support.

The impact of COVID-19 on businesses so far

COVID-19 has had a large, albeit varied, impact on Australian businesses. Many businesses have seen significant negative impacts, whilst others have either not been affected, or have been affected positively.

What about employees?

Most employees appear to be reacting well, the most common views were:

  • “I have been quite amazed about how adaptable and positive our employees have been” (48%); and
  • “Employees are responding to the new challenges positively” (34%).

Morale is down for only 21% of businesses. These are encouraging statistics, particularly in a time where there has been so much change. Something that many employees have had to adapt to is working from home. At Vantage, we have learnt a lot from the COVID-19 crisis, and as such we are currently navigating our ‘new normal’.

Whilst working from home may make it more difficult to keep work and life separate for some, many of our employees have seen the benefits of increased productivity and the time saved from not having to commute to the office every day. The usual face-to-face interaction with colleagues and clients was replaced with video conferencing in Teams and Zoom. As restrictions have eased, we have moved towards a balance between working from home and the office. This has provided our employees with the flexibility to work from home a few days per week, whilst still reaping the benefits of in-person contact.

Working from home: Vantage opinions

Pros

  • Time saved from not having to commute to the office
  • Increased productivity (unless there are distractions or interruptions at home)
  • Better environment for deep work and prioritising tasks
  • Environmental benefits due to less travel and therefore pollution
  • Financial benefits
  • Health benefits

Cons

  • Can be more difficult to keep work and life separate – the office usually serves this purpose
  • Less face-to-face time with clients and colleagues
  • Home Wi-Fi can be patchy
  • It can feel isolating working from home 5 days a week
  • Usual commute time may end up just being converted to work time
  • Can be more difficult for on-the-job learning from colleagues

Lessons Learnt

  • Teams and Zoom are sufficient for colleague and client communication, but are still not as effective as in-person communication
  • We don’t need to work from the office as much as before
  • On-site/in-person meetings are important for trust, context, body language and working dynamic
  • Having access to reliable Wi-Fi is important, particularly for webinars and certain meetings
  • Sometimes you just need your people around you to feel involved in everything
  • Social interaction is good for your wellbeing
  • Simply getting up and out the door feels great

It is reassuring to see that most employees have reacted so positively despite the challenging circumstances.

Government support

The Federal Government introduced several financial measures to support businesses through these difficult times. These financial measures were introduced on 25 March 2020 to last six months, i.e. until 24 September 2020.

Firstly, there has been a temporary increase in the threshold (from $2,000 to $20,000) at which creditors can issue a statutory demand on a company; and secondly, the time for companies to respond to statutory demands has increased from 21 days to 6 months.

Insolvent trading provisions have also been relaxed in what is essentially “COVID Safe Harbour protection”, that is, temporary relief for directors from personal liability while trading whilst insolvent. COVID-19 has caused an unusual lack of visibility and stability for businesses, so this gives companies the confidence to continue to trade through these uncertain times. Directors will not have personal liability for debts that are incurred in the ordinary course of the company’s business until 24 September 2020, unless it is extended by the Federal Government. ASIC statistics show a corresponding reduction in external administrations for April ’20.

How does this differ from the statutory Safe Harbour protection? The statutory Safe Harbour provisions provide directors with protection from personal liability for trading whilst insolvent, subject to specific criteria being met. These criteria include paying employees on time, lodging tax returns on time, and developing and implementing a plan that is reasonably likely to lead to a better outcome than immediately appointing an administrator or liquidator.

The statutory Safe Harbour applies to all debts that are incurred directly or indirectly in connection with the turnaround plan. A debt incurred directly or indirectly in connection with the turnaround plan may not be a debt incurred in the ordinary course of business. Due to this uncertainty, the statutory Safe Harbour protection will continue to be useful for Australian businesses as they respond to the financial challenges brought about by COVID-19. Directors should therefore seek to rely on both safe harbour regimes during the six months to 24 September 2020.

Other financial measures introduced by the Federal Government include substantial wage subsidies through JobKeeper, which allows eligible businesses to receive a fortnightly wage subsidy of $1,500 per eligible employee. JobKeeper is a six-month assistance package, set to finish on 27 September 2020.

The Federal Government has provided for the deferral of taxes such as PAYG, BAS, and Payroll Tax.

For our clients, these deferred tax debts are equivalent to at least 25% of their forecast FY21 annual EBITDA, and these debts will fall due in September or October 2020 as a lump sum. At the same time, the Government financial relief measures, such as JobKeeper, may come to an end. Q3 2020 will therefore represent a critical point for many businesses moving forward. As Michael Chaney says: “The question is where we’ll be when the six months of JobKeeper is finished, because I suspect quite a few people, and quite a few small businesses, are going to find it difficult to survive because revenues won’t be up where they were before. Unless the government extends its support, they’ll find they have real cashflow issues.”

The future of Australian businesses after September

The Government measures mentioned above currently come to an end after six months. Of course, these measures could be extended, and further support may be available down the track. However, with nothing confirmed at this point in time, it would be unwise to allow your business to get to this six month mark (at the end of September) with no plan as to how your business is going to progress, and deal with a potentially material deferred tax debt falling due.

Surprisingly, 83% of our survey respondents were not concerned about their ability to reboot their business when business starts to return to the new normal.

It is critical now more than ever to be thinking about, and planning for the future of your business, particularly from September onwards. This applies to safe harbour protection, and financial modelling to ensure you’ll be able to pay your debts as and when they fall due (including those deferred tax debts) and have enough cash to reboot the business.

 

Source: McKinsey

The above infographic provides a great summary of what businesses should be focusing on at this time.

  • Stabilise your business by pursuing cash conservation strategies such as accessing Government financial support, staffing level changes, negotiating extended payment terms with creditors, rent relief, overhead reductions, tax deferral, and accelerating payments from customers.
  • Develop a financial model based on the business’s current situation, which takes into consideration expected future performance and assumes that you pay deferred debts when they fall due to identify the challenges ahead, and then develop appropriate solutions.
  • Look at what has worked well for your business during COVID-19, and assess whether that justifies any change in your business model. What was working well before the pandemic may or may not work well post-pandemic, so it is important to consider what the ‘new normal’ is going to look like, and how that might affect how you can best run your business.
  • Develop an effective plan keeping the above in mind, and start implementing it!
  • Use the financial model to test strategies and plans to ensure they are realistic and achievable.

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