Over the past few weeks, the unprecedented global COVID-19 crisis has directly and materially impacted economic activity in Australia. This has caused many otherwise healthy businesses to experience material reductions to revenue while overhead expenses have remained fixed. The result has been a cash flow crisis, and even potential solvency concerns, for many Australian businesses.
If your business is in this situation, an immediate and robust business rescue plan is necessary to give you the best chance to ride out the crisis and ensure long-term viability. Hard decisions need to be made and made quickly.
This crisis will pass and we expect economic activity to return quickly once it does, but businesses need to ensure they have plans in place to come out the other side. Being proactive is critical.
We recommend clients facing this scenario follow the outlined steps below to best prepare and manage through this business crisis.
Step 1 – Build your ‘new world’ cash flow forecast
The world and business environments have changed quickly. It’s essential that boards and management have visibility on the new reality in order to make informed decisions. To do so, businesses need to build a three-month cash flow forecast (weekly) that takes into account their ‘new world’. Once the next three months is understood, the forecast should then be extended a further nine months (monthly).
While building your cash flow forecast, it’s important to consider revenue impacts while retaining committed expenses as they currently stand. This will identify if cash flow is still positive given the current conditions. If not, businesses need to understand their cash burn and what the timeframe is before existing reserves are exhausted (follow steps 2 to 7 to assist with this process).
Step 2 – If you have a cash deficiency now or coming up – identify measures to reduce costs or increase revenue
Identify discretionary or non-business critical expenditure that can be eliminated immediately. Next, consider overhead costs that through negotiation can be deferred, adjusted or removed (e.g. rent, equipment leases, employee costs). Lastly, identify capital outflows that can be deferred or adjusted, including dividends, bank loan repayments or capital expenditure.
Step 3 – Engage with key stakeholders regarding potential standstill arrangements
This step will be critical to business success. Businesses need to engage with key creditors such as landlords, lessors, ATO and suppliers, to explain their situation and attempt to negotiate standstill arrangements where possible. An independent report from your accountant or financial adviser on your financial position can assist with these negotiations.
Step 4 – Conduct due diligence on other capital sources available
Consider collateral and equity available to support finance. As part of this step, engage with existing financiers to:
- Bring them into the fold – they can be one of your biggest allies in these situations
- Identify additional facility headroom – consider drawing down cash and stockpiling on your balance sheet
- Identify new facilities available from your existing financiers.
It’s also important to consider new financiers or products that may assist to bring forward cash receipts (e.g. asset-backed loans, debtor finance facilities or working capital loans as part of the government stimulus package). Equity sources should also be considered here. Questions to consider include:
- Do existing shareholders have the capacity to contribute?
- Are there logical buyers of your equity you can approach?
- Do you have non-core assets that can be realised in a short time to generate cash?
Step 5 – Consider government support available
Identify the measures in the federal government’s stimulus packages and state government support programs that are applicable to you. Determine how these support programs affect your cash flow and apply where relevant.
Step 6 – Develop a 90-day ‘business rescue’ plan to maintain solvency
Use the knowledge gained through steps 2 to 5 to develop a 90-day ‘business rescue’ plan. The ‘business rescue’ plan should include action items with respect to:
- Implementing the cash flow measures as identified above (i.e. apply to the financier for funds and negotiate with creditors for standstills)
- Engaging with key stakeholders such as employees, financiers, landlords, customers, suppliers and remaining creditors to ensure they understand your position and what you need from them to continue business.
Step 7 – Update your cash flow forecast for outcomes of steps 2 to 6
Re-evaluate your cash flow forecast to align with your 90-day ‘business rescue’ plan. As outlined in step 1, set your initial forecast for a period of 90-days on a weekly basis to be sure you can remain cash flow positive. Once you are confident you can manage through the next 90-days, extend your forecast for a further nine-month period. Remember to take into account any timeframes of standstills agreed to determine when you will exhaust cash reserves.
Step 8 – Implement the plan and monitor regularly
Now that you have developed your ‘business rescue’ plan and cash flow forecast, start engaging with relevant stakeholders to put the plan into action. Monitor progress regularly and keep updating your cash flow forecast (we recommend weekly to begin with) to monitor the length of your cash reserves. Be conscious of when your reserves will become exhausted so that you do not continue to incur expenditure past this point.
If your organisation is experiencing financial difficulty, please contact a member of our Business Restructuring team who understands the options and turnaround strategies that may be available to your unique situation. Our team has the experience and trusted relationships with key stakeholders, such as financiers and relevant statutory bodies, to facilitate the right outcomes for your business
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