COVID-19/Corona Virus is on everyone’s mind and appears to be the only thing being spoken about. There are plenty of views about the health impacts of the virus and the implications for the wider community, but as a business owner it is crucial that while there are many unknowns, planning and being prepared for the (largely unknown) impacts is critical. What is clear, is that all businesses have or will be affected by this in some way, shape or form and you cannot put your head in the sand and hope it will all be OK.
Our business advisory team have been considering the impacts of this outbreak and what key areas business owners must be thinking about. Every business and its circumstances are unique and there will be different challenges for different businesses, however, there are common themes and below are the top areas we have identified that you must be across as a business owner:
1. Cash flow
Is your business ready for a sharp or sudden change in cash flows? It is our opinion cash flow planning is always critical to the success of any business; however, in times of uncertainty, it is more important than ever that you understand your current and future projected cash flows. No one seems to know with certainty how deep this will be, however you must understand how varying scenarios will affect your cash flow. All businesses should be preparing 3-way forecasts and you must be modelling and considering varying outcomes.
2. Supply chains
It is not controversial to say that most supply chains WILL be affected in the current environment. Fortunately, in Australia, we have the benefit of seeing what has happened in other countries that have been impacted already, but unfortunately, many of our goods or components that are critical to our goods are imported. You must be talking with suppliers, understanding the measures they are putting in place and assessing what impact you will feel if there are delays, difficulties or potentially a complete inability to source stock, materials, consumables, and other goods.
3. Business interruptions
If your business experiences exposure to the virus, how will this affect you and can your business continue to operate at full, part or no capacity and have you considered risk mitigation processes? Specifics and examples vary widely depending on the industry, however, you must do a 360-degree review of all facets of your business and consider how interruptions could occur, how it can be mitigated and what you can do should an aspect be impacted.
4. Diversified revenue streams
Is your business heavily reliant on a particular revenue stream that will be affected? For instance, are large public events or gatherings a major part of your business, which you could see revenue fall to zero if or when we face bans on public gatherings or attendees choosing not to attend due to health concerns. Are there alternative means to communicate or undertake services in a different way?
5. Cost structures
If you have a sudden drop in revenue (or spike if your business is positively affected) is your cost structure appropriate whereby you can scale down or up in your costs. If for example you have a heavy fixed cost component to your cost structure and you have a sudden drop in revenue you will be far more exposed than a competitor who has a much more flexible/variable cost structure.
6. Get on top of and understand your numbers and drivers in your business
To make smart decisions it is crucial you understand what drivers or levers you have in your business that you can push or pull to achieve the desired outcome. It is all well and good to understand the risks and consider what you need to do, but if you do not have appropriate advice or clearly understand what actions to take the impacts could be severely detrimental.
7. Ensure funding lines are secure
Banks HAVE changed their view of the world and what that means from a risk perspective and how assessments will be made through this changing lens. You must ensure that you do understand your funding requirements, but also ensure these are in place now. We predict that turnaround times for banks will only get worse and that lending proposals will be much more closely scrutinised. If we see this become a worst case scenario we could even see banks undertaking major structural changes as we did post GFC.
8. Care for your staff
The health and wellbeing of your staff will be critical to your business’ ability to pull through these periods. Employees will be concerned about their health, and the wider economic impacts they will feel, including questions on job security. Ensure you clearly communicate appropriately thought-out plans with staff in a timely manner, but do not rush and make announcements that are not well thought through that could create more questions or panic amongst the team. The welfare of your wider team is critically important.
9. Position yourself to take advantage of stimulus measures (that are appropriate)
In the detailed excerpt below, we have digested the recently announced stimulus package, although some details are not completely clear at this point in time. These measures have been intended to produce a kick to the economy and there are some appealing components that businesses should look to capitalise on. However, DO NOT take actions solely based on a stimulus that looks great for tax purposes. These concessions are fantastic and you should look to capitalise where sensible to do so, however understanding the broader impact on your business is critical. You should not let the tax tail wag the dog and rush out to buy capital assets for added depreciation deductions if this isn’t a wise business decision or cash flow simply cannot support this capital expenditure.
10. Plan thoroughly, consider the impacts, but keep moving forward.
There is a lot of information, misinformation, panic, and uncertainty around now. It is critical to plan and ensure you are prepared, you have the support and are making good decisions around your business plans, but you need to ensure you are not completely distracted from your core business and that you keep business as usual functions operating.
11. Cash flow
This one is so important the team felt the need to mention again. It cannot be stressed enough that whether you are positively, negatively, greatly or minimally affected by the current circumstances, you must have cash flow under control, understand where you sit currently and what peaks or troughs are coming and be ready. Similarly, there will be opportunities throughout this period and if you want to be one of the businesses that pounce on these opportunities you must have the access to the capital required to take full advantage.
Here to Help
Hoffman Kelly are here to help you and your business. If you would like to discuss your specific business in relation to the current conditions, please pick up the phone and give us a call.
ECONOMIC STIMULUS PACKAGE
The government yesterday released details of its planned stimulus package, which aims to keep Australians in jobs and help small and medium businesses stay in business.
The main elements of the package announced are:
- Tax-free payments of between $2,000 and $25,000 for eligible businesses with a turnover of less than $50 million who employ staff between 1 January 2020 and 30 June 2020. The exact wording of the release says that “Businesses will receive payments of 50% of their BAS or IAS from 28 April with refunds to then be paid within 14 days”. We cannot be sure, but are interpreting this to mean that businesses will receive refunds of 50% of the PAYG Withholding amounts reported on their quarterly March 2020 and June 2020 BASs or monthly March, April, May and June 2020 IASs.
You lodge a March 2020 BAS which reports withholding from wages of $14,000. You would receive a refund of $7,000 of this amount (likely as a credit to the ATO account where you pay your BAS). You would also be eligible for a further refund when lodging your June BAS.
- Eligible employers will be able to apply for a wage subsidy of 50% of an apprentice’s / trainee’s wage for up to 9 months from 1 January 2020 to 30 September 2020.
For Business Investment
- The instant asset write-off threshold will increase from $30,000 per asset to $150,000 per asset for assets purchased from today to 30 June 2020. This will apply to businesses with turnovers under $500 million.
You buy a new tractor for your farming business for $60,000 in April 2020. Instead of having to depreciate this asset over a number of years in your tax return, you will get the full $60,000 tax deduction in your 2020 tax return. This is a timing only benefit, as the full cost would eventually be claimed under normal depreciation rules, but it should assist for cash flow (assuming a tax rate of 27.5%, this will save tax of $16,500 if your business otherwise would have shown a profit of at least $60,000).
- Businesses will be eligible for an ‘investment incentive’ for purchases of new depreciable assets. The wording of the release says that “businesses will be able to deduct an additional 50% of the asset cost in the year of purchase (through to 30 June 2021)”. We understand this will only apply to brand new assets (not to second hand purchases).
Some people are interpreting this to mean that if you purchased the tractor as specified above for $60,000 in April 2020 that your business would not only be able to claim the full $60,000 tax deduction in the 2020 tax return, but would actually be able to claim a $90,000 tax deduction (being an additional 50% of the asset cost). A stimulus similar to this applied in 2009. Such a measure would be a permanent tax benefit to most businesses (rather than just a timing benefit) and would assist with cash flow.
However, some others are interpreting this measure to only apply if an immediate deduction claim is not available. If that is correct, it would mean that you get a 50% accelerated depreciation amount and claim normal depreciation on the balance. For example if you purchased a $200,000 tractor now, you would not be eligible for an immediate write-off, but would be entitled to a $100,000 deduction (being 50% of the cost) as well as normal depreciation on the remaining balance.
- A one-off $750 payment will be made to pensioners, social security, veteran and other income support recipients and eligible concession card holders. The payment is tax-free and will be made from 31 March 2020, with 90% of payments expected to be made by mid-April.
- Further plans and measures to support sectors, regions and communities disproportionately affected economically, such as tourism, agriculture and education, will be developed to the value of $1 billion.
These measures are not yet legislated. The Parliament is scheduled to sit on 23 March but may be recalled earlier. Full details of the measures (some of which are still unclear) will not be known until then. Before you make any major decisions about your business please contact the accountants at Hoffman Kelly to ensure you properly understand whether the measures will apply to you and the benefit that you will get from them.