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The business world is potentially looking down the barrel of one of the worst recessions since The Great Depression. Keeping your company afloat during a recession can be difficult, but is not impossible. For those companies that are facing tough times ahead, there are some things that you can do which may help you through.
If you are concerned about how your business will fare in the upcoming recession, contact Nash Advisory. Our expert business advisors can help you find a way forward.
Before the recession hits
Companies that are able to pivot into new industries or make new high demand products based on changes to the economy or operating market (like COVID-19) tend to be able to fare better than those that are rigid and unable to move with the changing times.
If you are facing a period where you are unable to operate based on your current business model, then you may need to seriously consider other avenues to bring in revenue. These could be products that are in demand or new markets in which to enter. Here are two great examples:
- Gin distilleries making hand sanitiser
- Plastic manufacturers making ventilators
If such avenues are unavailable to you, there are still some things you can do to prevent against a recession.
1. Forecast out your cash flow
All companies impacted by COVID-19 need to have a firm understanding of their cash flow. This means you need to prepare a cash flow forecast for the company based on a best-case, base-case, or worst-case scenario. This will also allow you to see what future payments you are required to make (such as PAYG, BAS, superannuation, creditors) and when it is likely that you will receive cash from your customers.
Once you have a firm understanding of your cash flow, you can then work out some cash management strategies to ensure you can survive the downturn. Outlined below are some strategies you could use:
- Ask the ATO to give you relief. The ATO is willing to provide payment terms to certain companies based on their track record of paying tax on time. If you are a company with a good track record, be proactive and engaging with the ATO to see if you can get a holiday from paying your BAS or PAYG.
- Ask your loyal customers to pay early. For your major customers, you could reach out to them and ask to be paid early for the few months of the year. If you are an important supplier to them, they may be willing to help you to sure up their own business. As an incentive, you could offer a small discount on the invoice if they pay within a time period.
- Speak to your bank. There is no harm in asking your bank manager for an extension of your overdraft. In many cases, the banks will be willing to extend overdraft limits if a long and trusted relationship exists. Recently, banks have been very reluctant to put companies into receivership and are more likely to negotiate and find a solution to ensure the long-term survival of a business.
- Ask your employees to join as equity partners. For some of your highly paid employees (general managers, CFO, COO-level) ask if they are willing to take a pay cut or swap salaries for equity in the company. This will not only result in large cash savings, but also tie those employees to the business long term. They might also be willing to invest their own money to buy shares in the business.
- Sell assets. This might be obvious but if you have surplus assets it is better to sell them at a 20% discount to sure up your cash position (and company) than to let it go into insolvency. We suggest that you look at your asset pool and decide which assets are required and how much they are worth in the market.
Remember, most companies fail not because they are not profitable, but because they run out of cash. If you can sure up your cash position, then you have a great chance of surviving the pandemic.
2. Raise equity
If you have implemented or assessed all the options above and you still require further cash to survive, then you can look to raise equity. This option would require an outside investor to buy shares in the company from you. Although this may seem to be relatively straightforward, there are some things to consider before you go down this route:
- New shareholder or owner. Depending upon how much equity the new investor or shareholder buys of the business, you may lose effective control of the company. A well-structured shareholder's agreement needs to be agreed upon by all major shareholders. The shareholder's agreement governs the shareholder relationship on all matters relating to the company operation and administration.
- Finding the right partner. Unless you have a wide network of high net wealth contacts, being able to find the right partner who has the money to invest can be challenging. Ensuring you get the best deal in terms of getting the highest possible price for shares sold is also hard. This is why we recommend using an experienced corporate advisor when seeking outside equity investment.
3. Appoint an administrator
If you have exhausted all your options above and are close to being insolvent (or are insolvent) then you should consult an experienced insolvency practitioner as soon as possible. They will be able to guide you as to whether you should put the company into Voluntary Administration. It should be noted that many companies come out stronger and better equipped to deal with the challenges of a recession once they have gone through an administration process.
4. Engage with senior management
In terms of strategic direction, we suggest bringing in your senior management team along with your corporate advisor to brainstorm ideas for where the firm can take advantage of the situation, and potentially, change course. Your employees will have some great ideas and including them in a company-wide strategy session will further engage and empower them to help drive the company through the situation.
5. Look at a merger or strategic partnership
This could also be the perfect opportunity to go ahead with a planned merger with another company. Consolidating two businesses is a good way to sure up a long-term future for an organisation. There is also a surplus of talent available in these times so your company might be able to pick up some excellent recruits to help bolster the management muscle.
