Accountants are in high demand at the moment with Stimulus,  JobKeeper and the regular final cycle of the year-end tax work. However looking not too far forward many at risk clients will be also looking to their accounting firms for help  with their survival and then revival programs. There may even be some inward consideration by  accounting firms of what impact corona is having on their own business and what should be done about it.

 As we see it, there are essentially 3 options available to any at risk SME: do nothing and hope for the best, shut the door permanently or work on turning things around for the medium and long term.

The following 6 steps are aimed at helping you to help your clients turn things around and avoid liquidation.

Step 1. Agree a Plan is Needed

The first thing to do is “not to panic”. Oddly enough if logical well thought out programs are followed then any distressed business has a better than even chance of surviving and reviving. The unexpected economic tsunami has taken most managers by surprise and there is presently a collective emotion that there will be some corporate wreckage arising from the event.  The best way for a client to avoid being “corona economic roadkill” is to have a plan. 

Step 2. The Diagnosis

With huge numbers of businesses in the same collective boat the first thing to do is to put in place a process that will provide relevant information to help make the necessary rational decisions as the landscape evolves. Making the decisions will revolve around the plan that is developed based on the information you can bring together. For example, if the business is an SME with turnover $500k to $50m, then the owners/directors alternatives are A) Will we be unaffected? B) If we are affected can we trade out? C) If we are seriously affected is it time to turn the lights out and move on or are there alternatives?

This is essentially the same process as we apply during a client turnaround and includes:

  • making an assessment of the assets and liabilities This may produce some unexpected and unwanted assessments but nevertheless its fundamental intel.
  • getting a sense of what the realisable and unrealisable assets are. In a financial distress situation cash in readily realisable assets (assets such as receivables, fast-moving stock) are enormously important. Obviously the more available cash, the more options present themselves.
  • approved lines of credit should be reviewed and some quick decisions need to be made as to whether those lines should be called upon. This is akin to building a ‘cash war chest’.
  • obviously, benefits under Government stimulus packages need to be reviewed and factored into the diagnosis, including JobKeeper, apprenticeship subsidies, PAYG credit, government-backed line of finance and so on.
  • liabilities that need to be considered include: are debt facilities in default or heading that way? Do creditors have rights to collect stock or leased plant & equipment? Are any creditor demands on foot? Are any creditors withholding supply? Is the landlord playing ball and presently complying with the Mandatory Code of Conduct?  What are the employee entitlements situation? Are the taxes outstanding and if so which ones?

Step 3. Cash Flow

Cash is king, but also on the same level is a requirement to constantly review overheads followed closely by maintaining (or increasing) the current or a new customer base.

This means keeping a short-term, medium-term and long term view on cash flow. Daily/Weekly monitoring may become the norm. Realistic estimates moving forward including the stimulus provided by the Government should be factored in. Where the numbers don’t stack up considerations have to be made as to how to make the equation work. Can the business negotiate with landlords over and above the mandatory relief, defer critical payments, reduce staff hours and rates, negotiate better terms on supplies. In these times all ideas should be considered.

Step 4. The Business Plan

Once the diagnostic has been completed and the cash and funding scenarios worked out, the business needs to act as if a crisis is upon it. That is, management needs to be ‘all over’ the changing landscape and can’t assume there is any business as usual.  

The method of business needs to be reviewed and one must keep in mind that everything can be on the table for re-negotiation. Essentially the old business plan has to be thrown out the window and a new one created. The intel will be fed into the process and the management team (with their accountants and advisors) will work out the program moving forward. 

Factors to take into account include:

  • Should the business change its market position (and therefore competitive advantage)? Just one option is to focus on a new market niche that doesn’t already exist by refocusing based on things like geography, a particular industry sector, gender or other demographics. Think about the first female gyms as just one example, but the same concept can be applied to literally any business. This is sometimes called ‘going narrow’ and is the opposite of what many SMEs naturally do.
  • The clientele and the products/services provided need to be looked at very closely to see if what was previously offered makes sense moving forward. If demand has dropped for some or all offerings, then strategies need to be developed to deal with this changing landscape. Buying channels then need to be revisited. Perhaps different supply lines have to be sourced as overseas markets are severely impacted by government policies.
  • Ensuring the right people are in the right positions for the new business environment. People who once occupied certain positions may not be the right people for the job right now. Plans need to be developed for dealing with and managing critical stakeholders. Communication channels need to be established and plans created as to how various parties will be dealt with.
  • One of the most critical factors in all the above is new ideas. One way this can be achieved is through a brainstorm of all relevant stakeholders and not just the Board and/or management. (See more in Step 5).

The earlier all these factors are nominated and thought through the faster a business can be re-established and be set off on a rationale course.

Step 5. Negotiate With Relevant Stakeholders

While listed as Step 5, you can and should be thinking and working on this now. Stakeholders critical to the business need to be managed and strategies developed as to how to deal with them under the evolving environment. This is necessary because the right information to make decisions is needed. As an example, if the business is a Franchisee don’t assume the Franchisor will act in the same way they have acted in the past. Keep in mind that support may come from many unexpected quarters.

Bankers want to know what the plans are for the business and if the business requires some alteration to the existing arrangements now is the time to meet and negotiate. The banks do not want an avalanche of non-performing facilities. They will be in a frame of mind to establish things like ‘standstill’ arrangements and extensions of overdrafts and relaxation of repayment schedules. Now is the time to negotiate.  

Landlords will put on a brave front and won’t approach the tenant. However, they have to negotiate at the moment so a plan should be developed and the landlord approached. The power of a possible vacating of the premises will certainly focus the landlord’s attention.

Key Employees have to be engaged to ensure the business has the right people to get the business moving again. It may be advantageous to consider some alternative people who may be more suitable for a ‘restart’ rather than a business as usual. No business likes to retrench staff. However, this will be an opportunity to re-engage those staff who are critical to the business and to let go of those that are not.

Critical suppliers and service providers will need to be engaged and probably with frank dialogue. The business is part of a supply chain and suppliers do not want customers to fall over. They will want to assist as much as they can so as their business survives also. Negotiating more favourable terms is best done right now when the environment is sympathetic to the perils of the customers.

In summary, stakeholders have an ongoing interest in the business continuing to trade. If parties work together then better outcomes can be achieved. 

Step 6. Stay the Course: Think Twice About a Formal Appointment

Don’t make decisions that haven’t been thought through. There is still time (in many situations) to fully analyse the issues and try and get better results. Unless there is a compelling reason to seek ‘legal protection’ through say a Voluntary Administration or Liquidation, do not press that button. The recent changes to the law have been decreed to allow all businesses time to consider all options. 

In summary, shutting the doors permanently should only be considered if all avenues have not been explored. And living in hope just makes things worse. While many businesses are shut or at low capacity, and while stakeholders are favourable to change, now is the time for accountants to consider how you can help your clients survive and revive and avoid liquidation. Hopefully, these 6 steps help with that.