Businesses should position for long-term recovery

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April 23, 2020
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MEDIA RELEASE: Any steps taken by businesses now to review key functions such as funding models and service delivery could be instrumental in determining their viability on resumption of normal trading, according to restructuring and risk advisory partner at HLB Mann Judd Sydney, Todd Gammel. 

Mr Gammel said business owners should be utilising the current “hibernation mode” resulting from the COVID-19 pandemic to reassess funding options, and consider how they are going to operate and cover expenses when trading restrictions are lifted. A wholesale business, for example, will have stock to sell and, while they could pay wages, there’s a timing issue between selling the stock and receiving the cash.

“First and foremost, cash is king – it should be the number one priority, especially for smaller to medium-sized businesses. This means getting as much as you can and using it the right way, to minimise the impact stemming from COVID-19,” he said. 

For those business seeking external financing or support, formalising a recovery-led business plan is an important way for business owners to demonstrate funding and strategy options, according to Mr Gammel. A single document can be used to explain the business’ position to the ATO, banks and other lenders, landlords, key suppliers and investors, ensuring consistency of approach.

“The ATO is willing to accommodate reasonable proposals from businesses at this point in time – it doesn’t want to be responsible for destruction of any businesses, particularly for those that have a good history but also those with an updated business plan. On the other hand, those businesses with a chequered history who can’t formally demonstrate how they’re going to fund their way out of this or defer debt will be of far greater concern. Even for responsible businesses, the next six months after restrictions are gradually lifted (and some stay in place) may be challenging,” he said.

Once businesses clearly understand their financial position, Mr Gammel recommends they consider an independent business review which would include the review of a recovery-led business plan. For any businesses showing signs of distress or cash flow pressure, this may be in the form of an independent Safe Harbour review, which provides the structure required for a plan. The review is undertaken by an independent third-party, typically an insolvency expert who assesses forecasts (including reasonableness of revenue and costs), considers possible options and alternatives, and value of the business.

Mr Gammel also said going concern requirements for companies subject to audit this year are likely to be more extensive, with businesses needing to review forecasts diligently for the COVID-19 impact on the balance of FY19 and into FY20. ASIC would be expected to provide guidance on how businesses should report the impact of COVID-19, including what the business has done to assess and understand the impact, as well as measures to mitigate the impact on revenue forecasts this year and next.

“All listed entities have disclosure requirements, which are intended to help manage the expectations of investors, and require them to report any material risks. If businesses are prepared to report coronavirus hasn’t been material, then they will be required to justify it. 

“What we are seeing is a restructure of large sections of the economy and a significant downturn with many sectors in the economy (such as travel and education) having to adjust to a new normal that may last well into 2021. Emotionally, this will affect people for a couple of years. Business owners and managers won’t wake up six weeks and it’s all done – it’ll take a while for all the impacts and changes to wash through the economy, but it appears unavoidable,” he said.