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COVID-19: Business hibernation strategies
09 April 2020
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11 minute read
COVID-19 is having an unprecedented effect on businesses everywhere. For some businesses, their supply chains have been impacted, while for others, demand for their product or service has entirely dried up overnight.
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In Australia, the government has imposed a range of restrictions including many social distancing measures to curb the spread of the coronavirus. This has had the unfortunate effect of forcing a variety of businesses to shut down altogether, and many others have had to implement large-scale work-from-home measures.
In challenging times, we are often forced to look outside the square to problem-solve. This change in mindset, while driven out of necessity, may well result in COVID-19 paving the way for an unprecedented surge in innovation and digitalisation globally as we all work from home. Apparently, Isaac Newton formulated his theory of gravity when he was working from home due to the plague. It was when he watched an apple fall from a tree in his garden that he had his light-bulb moment (metaphorically, of course, as light bulbs had not yet been invented!).
We are already seeing some businesses taking active steps to pivot their business model to adapt to the rapidly changing landscape. For example, retailers who have shut their stores are now able to refocus their attention on driving online sales and improving their online offering. Gyms are moving to web-based exercise classes. Dyson, known for its vacuum cleaners and air purifiers, is re-deploying its resources to produce ventilators for UK hospitals.
Even at a more personal level, it is not uncommon to hear of individuals who have gone on, post-redundancy, to discover an entrepreneurial spirit they never knew existed, mostly because they had no choice. These “reluctant entrepreneurs” generally have significant managerial and operational experience which often leads to greater financial success.
Unfortunately, despite their best efforts, many Australian businesses that were entirely viable pre-coronavirus are still battling for survival while simultaneously trying to save as many jobs as possible. This has led to many businesses effectively placing themselves into hibernation mode; a plan to wait out the storm and give themselves the best possible chance of emerging on the other side, whenever that might be.
Our advice for businesses who are thinking of implementing a hibernation strategy is to focus your efforts on four key areas:
- Your workforce
- Your landlord(s) and/or other major suppliers
- Your bank
- The ATO and State Revenue Offices
Your workforce
For most companies, their workforce is their single biggest asset, yet it is also generally their single biggest cost.
Before layoffs, consider some less obvious options for reducing costs in this area; for example, introducing a four-day work week which could reduce your staff costs by 20 per cent.
Have an open dialogue with your employees. Some might agree to working half-time if they know that doing so will save jobs.
Others might have large, accrued leave balances that could be taken. While this strategy does not conserve cash in the short term, it does at least reduce the business’s liabilities.
As a last resort, consider standing down staff or doing layoffs. Also consider whether you may still be able to access JobKeeper payments (discussed later) for affected employees.
Your landlord(s)/other major suppliers
In terms of dealing with landlords and/or major suppliers, we suggest being on the front foot and opening a dialogue with them early on.
Many businesses have had great success in negotiating rent-free periods, rent reductions or rent deferrals with their landlords. Other businesses have simply stopped paying their rent, taking advantage of the temporary moratorium on eviction for non-payment of rent announced by the government.
Similarly, businesses should seek to understand what is happening in their supply chain. You may be able to negotiate with suppliers to obtain more generous payment terms, pricing and potentially renegotiate other contract terms.
Your bank
For businesses affected by the coronavirus, now is also a good time to engage with your bank.
All of the big four banks have openly stated that they will provide repayment holidays of both interest and principal on existing loans for between three and six months. Business owners should also consider whether this may be available for their personal, investment or home loans.
We have also recently seen the introduction of a $250,000 loan guarantee scheme where banks are offering unsecured loans of $250,000 to small and medium-sized businesses with no repayments required for six months. These loans are 50 per cent guaranteed by the government, and hence, we understand that banks are taking a “light touch” approach to credit assessment on these loans.
Our advice to business owners is to apply for these loans even if there is not an immediate need. It is always better to apply for a loan when you don’t need it than when you do need it!
The ATO and State Revenue Offices
Finally, businesses should consider the range of federal and state government response measures that may apply to them such as the PAYG withholding cash-flow boosts, the JobKeeper payment and state-based payroll tax reductions/deferrals.
Businesses can also look to vary their PAYG instalments down to take account of their drop in taxable earnings. Depending on your position, you may even be able to claim a credit for PAYG instalments already paid.
The ATO has also indicated that it will provide a range of payment deferrals and low-interest payment arrangements in relation to outstanding tax liabilities.
Regardless of the strategies adopted to survive or even beat COVID-19, we recommend that businesses engage in frequent communication with key stakeholders — including staff, customers and suppliers — through clever and targeted messaging.
Manda Trautwein, director business advisory, William Buck
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