Emerging from lockdown – use the runway wisely

Whilst the various stages of lockdown have presented challenges for business owners and their leadership teams, research indicates that only around 10% of businesses have used lockdown to critique their business and develop a plan out of COVID-19. Without a plan, how can directors comply with their statutory obligations to exercise their duties with appropriate care, skill and diligence, and act in the best interests of the company?

Whether they be family business owners or an institution’s executive and board, leadership teams have a threshold question to consider – “Do we push on, bow out gracefully, or hibernate?”. What objective criteria will leadership teams use to answer this question? And how will the finance function and accounting profession assist leadership teams?

The temporary relief for directors from personal liability for insolvent trading under the COVID-19 Government support package ends on 31 December 2020. If you have any concerns about the business’ viability or solvency after this date, you should consider Safe Harbour (s588GA of Corporations Act 2001) which provides directors with a defence against insolvent trading. In seeking to rely upon the Safe Harbour defence against insolvent trading, directors will need to comply with the relevant provisions which, relevantly, include the obligation to develop an appropriate plan.

Reflections from lockdown – what did we learn?

Don’t waste the crisis - business owners and leadership teams should leverage the learnings from lockdown as part of planning their way through and out of COVID-19. This includes considering how best to engage with key stakeholders who will be critical to the rebuild and ‘other side’. Consider as you reflect:

• Cash is king – “How long have we got?” Did you build a cash buffer? Were you focused on cash preservation?
• Forecasting - get the cash flow architecture right, and apply non-emotional rigour. What are the next five critical cash events?
• What business enhancements did you identify and implement – new vs. existing markets, critique customer relationships, inefficiencies, supply chain, creditor management, key stakeholder reporting protocols?
• Suppliers – critical vs. important vs. non-essential vs. alternatives
• Identify and deal with COVID-19 legacy issues and post COVID-19 stress-points before it’s too late
• How appropriate is your information in making critical decisions, e.g. strategic acquisitions?
• Capital – balance sheet strength/weakness, working capital quality, capital required for the re-build (quantify accrued/deferred liabilities).

Key stakeholder benevolence will end

Leadership teams should use the lead-time ahead of the expiry of the various government stimulus packages, concessions and moratoriums to prepare for the ‘new world’. There has been a big focus on the Jobkeeper cash injections - a subsidy which will end. How will you quantify the impact of the impending expiry of stakeholder benevolence on the business? Leaders need to make the necessary changes to their business before the concessions and moratoriums end.

Strong relationships with key stakeholders will be critical for the re-start and ‘the other side’. These key stakeholders are likely to include bank/financier, landlord, suppliers, workforce, ATO and customers. Leadership teams need to be clear on:

• The support the business needs from those stakeholders as it emerges from lockdown and heads towards ‘the other side’
• Why it is in a stakeholder’s interests to support the business.

The re-start plan – how well prepared are you?

It is unrealistic to expect support from key stakeholders unless leadership teams have a COVID-19 emergence plan. The plan will assist them make informed decisions based upon objective criteria. It will also assist stakeholders to understand how prepared their counter-part is for the ‘new world’, and how it is in their interests to continue or adjust their support. Ultimately, what is the plan?

The following may assist leadership teams as they develop their plan, and assist with responding to the question “Do we push on, bow out gracefully, or hibernate?”:

• The business’ pre COVID-19 financial health
• The financial impact of COVID-19 on the business
• What concessions and moratoriums have the business obtained, and how will their impending expiry impact the business?
• Actions to reduce the business’ cost base and ‘right-size’ the business
• The business’s recovery trajectory – what is the plan and what is Plan B?

Hibernating is only an interim step. Ultimately, leaders must decide whether to ‘push on’ or ‘bow out gracefully’. Don’t wait until the government concessions expire to address this threshold issue.

Developing the plan

Our research indicates that between 25% and 50% of businesses expect they will:

• Need additional support from their landlord, bank, ATO, etc. after Jobkeeper expires
• Not be able to obtain funding from their bank after Jobkeeper ends (and that a material portion will be transferred to the bank’s impaired asset department).

Whilst these statistics are alarming, businesses which invest the time to prepare a plan will be best-placed to seek support from their stakeholders and, ultimately, navigate their way through the COVID-19 environment and out the other side.

The plan should not be onerous. The conversations people have in developing the plan is invaluable. The following high-level framework may be helpful:

Ten specific items to consider as you develop the plan and associated forecasting model:

1. People - Identify the appropriate planning and execution skills – internally or externally if objectivity is important. Be clear on everyone’s role. What will be your strategic contribution to assisting the business through its COVID-19 re-start and on ‘the other side’?
   
   
2. Key stakeholders – which parties will materially impact the business post COVID-19, e.g. landlord, bank, workforce, suppliers, ATO, etc. Their benevolence will end – quantify the impact and be clear on their expectations and tolerance. Develop reporting protocols during re-start and ‘the other side’ which will resonate with the stakeholders.
   
   
3. Business’ inefficiencies – how to address inefficiencies identified during COVID-19?
   
   
4. Business concessions and moratoriums – quantify their impact, what is their expiry date?
   
   
5. Financial forecasts - must reconcile to the plan. These should be informed by the business’ drivers and the assumptions. Debate the assumptions and levers, not the forecasts.
   
   
6. Deferred liabilities accruing through lockdown (and pre COVID-19 legacy creditors) – quantify them and determine how best to deal with them?
   
   
7. Real-time post COVID-19 monitoring tools – develop appropriate tools as your critical KPIs, e.g. cash based, cash burn, working capital, cost coverage. Measure and monitor the business inputs. Traditional metrics/KPIs aren’t enough, e.g. P&L.
   
   
8. Re-start and re-build your capital base - What is appropriate? What if the bank won’t provide additional funding? What are alternate capital/finance solutions?
   
   
9. Monitor the restart plan - the post COVID-19 business changes and enhancements, and contingency plans. What if the plan isn’t working?
   
   
10. Restructuring options for business experiencing post COVID-19 financial stress - if you need to restructure, do it sooner rather than later. Stakeholder goodwill, a key component of any restructure, is waning. Safe Harbour or formal insolvency e.g. voluntary administration?

Use the asset base and shortening runway wisely

Businesses and owners have finite capital – proper planning and forecasting will assist with clarifying the decision of whether to ‘push on’ or ‘bow out gracefully’.

Lockdown, Jobkeeper and the various other concessions will expire or scale down shortly. They provide a runway – use it wisely to plan your way out of COVID-19, to put the business in the best possible post COVID-19 position.

In the case of family businesses, the decision to ‘push on’ inevitably exposes a family business owner’s personal assets and the family home, which are invariably pledged as security to the business owner’s bank. What’s more important - attempting to re-start a business (without an appropriate plan), or protecting the family home?

Finance teams and accountants will need to think very differently in this brave new world, including as they interact with their colleagues.

The Author

Nicholas Martin is a partner in BDO’s Advisory team. He is working with a number of businesses, large and small, assisting them through the myriad COVID-19 business issues and ‘the other side’.

Please contact him if you wish to discuss any items raised, including how best to create the most effective post COVID-19 rebuild planning environment.