3-May-2020

Article by Warren Otter

This article is designed to make private business owners acutely aware of what is happening and what will happen to a large percentage of businesses, including yours.    Think past the end of September.  Can your business comfortably survive with the same level of staff and operating costs, on reduced revenue (say conservatively 15% or maybe up to 30%+ less) with increased debt which has occurred during the first phase of the E-COVID-19 pandemic?

Treat this six months (March –Sept) as the beginning of the E-COVID-19 pandemic, the full force will hit post September 2020 and will extend for some time. The second wave is about to hit and it will be hard.

In the midst of the current global landscape, we are presented with two great challenges in society:

1. The medical challenge from the human contracted COVID-19 virus which continues to infect millions of people around the globe, inflicting the deaths of over one hundred thousand people.
2. The Economic COVID-19 (E-COVID-19).  E-COVID-19 has infected millions of business around the globe and has already inflicted lasting damage to hundreds of thousands of companies that will be forced to change fundamentally or have already been forced out of business.  The effects are continuing to grow in magnitude and will expand into 2021 and beyond.  Arguably, the human impact from the E-COVID-19 will be even greater than the actual virus.

Already in the USA, unemployment is over 30 million people and climbing; that is greater than the combined populations of Australia and New Zealand.

Our diagnostic is that any business that has had a reduction in revenue or order intake of greater than 20% has contracted the E-COVID-19 virus.

There are industry sectors whose activity has not yet slowed but, their order intake has dropped by 70-90% (eg: new housing sector –  building on current houses continues and demand for goods is still currently flowing, but new housing orders are virtually drying up, so in six months’ time this sector will be significantly affected after the government support has ceased).  If you currently supply the housing sector, or other industry sectors that will be similarly affected, you may have a bigger impact still to come.

In Australia, the Federal Government (along with support from the States) has recognised the economic turmoil facing businesses.  It is extremely concerned about the economic fallout, hence the range of financial support packages they have put in place to try to support businesses.

However, the Government has clearly said that the amount of money that they are extending to support business is costing the government and future generations of taxpayers a significant amount and their ability to continue beyond the stated six (6) month is most likely not sustainable.

Furthermore, it is well understood by Government that around 80% of private businesses were already financially stressed or undercapitalised (weak balance sheet and cash flow) prior to E-COVID-19, hence the reason they reacted so quickly with support particularly for businesses with revenue under $50m.

Just as the hospital system was not ready for the potential large numbers of high care patients; the Government and the people of Australia were not, and are not ready for the high levels of unemployment and the resulting human effect.   Hence, the Government has introduced JobKeeper allowance to both delay and hopefully reduce the full impact of the unemployment.

However, when JobKeeper support stops and revenue for a large number of businesses remains 15%-50% (in some cases more) lower than pre COVID-19, businesses will not be able to sustain the same staff numbers, hence E-COVID-19 will continue to enact challenges.

A hidden (short term) benefit the government has provided businesses via JobKeeper, is not having to retrench staff now.   They have delayed businesses the pain of having to find large amounts of cash to pay redundancies – this delay may mean businesses can also reduce how many redundancies they will be facing in late September and October when JobKeeper ceases.  On the other hand this is a large pending cash cost for most businesses post September.

The following analogy, E-COVID-19, is based on what we have seen happen to humans who have contracted COVID-19;

1. The weaker (ie: low immune system = weak balance sheet / cash flow; elderly = out dated systems, strategies, etc) your business was before E-COVID-19, the greater the effect the virus will have on your chance of survival. The Panadol (temporary pain relief) that the government has provided will at best, for many of these businesses, give short term hope.  However, when the economic stimulus and support (from the insolvency# laws and rental code) cease, many will perish quickly.
2. If your business was relatively strong and healthy (ie: sound balance sheet, low debt, good access to cash) before E-COVID-19, the greater your options are for survival.

There will be variations to the above for businesses, even some of the healthier ones may be severely affected by E-COVID-19; that is their revenue may drop 60%+ and stay low for a prolonged period after the economic sanctions have been released.

Furthermore, it has been stated by the Federal Government that immigration will be basically put on hold and overseas student’s numbers are expected to drop significantly; both of these factors have supported economic growth in this country for the past 20 years.   Hence, it has been stated by the Reserve Governor and banks that they expect economic GDP will be well down due to COVID-19.

Business owners don’t expect this to bounce back in late September, for it to be business as usual again.  It won’t.   Those business owners who don’t take all the right advice and steps now, survival past September 2020 will be difficult.

Longer term solutions / options to E-COVID-19

However, there are a range of solutions for many businesses.   There are various strategic paths businesses can take to survive and for some (hopefully many) to actually come out with a significant advantage over the others who rely on government support and hope alone.

This is what the big companies are doing and not telling the private business sector.

Large companies are making decisions now, because they know they cannot rely on the government to support them and they are engaging some of the best Advisory firms in the country and around the world.  The likes of Deloittes, Ernst & Young, PwC, KPMG, Pitcher Partners are no longer purely accounting firms, they have been strategic advisory firms now for well over 20 years.   They are being engaged by large business to sort out strategic solutions to survive first and come out stronger.  I understand that these firms charge in the hundreds of thousands of dollars for their advice, but the value add via the solutions is going to save or make multiple times more than the cost.

The CEO’s and Boards of large companies don’t rely on just working harder, but they seek out teams of advisors with creative and proven solutions for difficult times.

With regard to what I have seen in the sub $50m revenue space of private businesses, the majority are not, as yet, actively seeking professional strategic solutions.  We understand that the sub $50m revenue business cannot afford the large advisory firms; but they also cannot risk doing nothing or relying on engaging their accounting firm (who specialise in accounts and tax returns), as 95% of these firms have no expertise in running business or solving complex business growth, turnaround or survival solutions.  Your external Accountant should be viewed as the GP who can work alongside the Specialist that they should be referring you to.

If you become infected with COVID-19, even if you are physical strong, you would get tested and monitor the situation; if you have underlying health issues to start with, I am sure you would accept the fact that the best action is to go to hospital for specialist treatment rather than be diagnosed and treated by your local GP.

Therefore, the question to Business Owners who are affected by E-COVID-19; are you seeking out Specialist advice for a solution or are you taking the Government’s Panadol and hoping it will cure itself?

We have assembled a team of specialists to specifically focus on Private Business E-COVID-19 Strategy Solutions, we will be reviewing your business and creating a specific path forward to ensure you are in the best possible position beyond September.

We also have identified additional areas of government assistance which (if eligible) will ensure that the cost of the strategy development won’t be onerous for private businesses.

Next step is to contact us via email and request a no obligation initial review to see if you will be suitable for our specialised architectural solutions. 

If you have developed a plan as part of your COVID-19 strategy, we would be happy to give you a second opinion as part of our initial review

# If you are not aware of safe harbour laws and the extended protection from insolvency until 24-September, please discuss this when you contact us, as this is one of the key ticking time bombs.