Download Article

Our most recent ANZAC Day got me thinking about the Australian spirit. It wasn’t hard considering the many stories of kindness that continue to flourish in the media: the supermarkets that organise pensioner-only times so our older population and those with disabilities can avoid the panic-buying hordes; the neighbours who are sharing food and other essential products with those who are struggling; and the many businesses who are providing their services for free or heavily discounted to ensure their customers don’t go without.

And it goes without saying how much respect we are all showing our medical community who are definitely in the frontline of this “war”.

In these self-isolating times, we’ve all had to “dig in” – to use an ANZAC analogy – and deal with the situation as best we can. While I know that things will come good again, I’m finding it incredibly difficult to see how much people and their livelihoods are being affected. Being at the coalface in the insolvency profession means I am all too well aware of how people are suffering. And while the federal and state governments are doing their bit with providing financial assistance, it shouldn’t be forgotten that this too, will eventually end.

 

As credit professionals, I’m sure you’re as aware as I am of the potential for greater trouble ahead once the financial support and debt-deferral initiatives finish. In fact, an inevitable “insolvency avalanche” is predicted if crucial decisions continue to be put off by organisations. While many businesses are just trying to make it through each day as best they can, if we want to flatten this upcoming insolvency curve, hard decisions need to be made now. Postponing tough decisions now will only postpone the inevitable.

One way we at Jirsch Sutherland are trying to flatten the curve is to get businesses thinking now about what could happen after the debt-deferral initiatives finish. We ask businesses to imagine how they’re going to pay six months’ rent, utilities and financing costs as a lump sum before they can reopen. This isn’t a “what-if” scenario; this is the reality as our economy begins to move into a recovery environment. I can’t imagine many SMEs, especially those that were already having financial issues before COVID-19, being able to take this type of capital hit.

I know it’s difficult to think ahead, especially when we’re all working together as a nation at the moment. But the situation will likely be very different in six or so months’ time. I remember what happened after the GFC. Our busiest period as insolvency specialists occurred 12 to 18 months after the initial shock as that was when the banks began enforcing repayment requirements. This is why I keep telling businesses that having an exit strategy for when the financial incentives finish is crucial.

 

As credit managers there is a number of actions you can take to ensure your organisation can avoid being part of the looming insolvency avalanche. And these first actions don’t need to be overly complex. You could start by establishing answers to straightforward questions, such as: has the coronavirus affected your customer’s business and, if so, how are they coping? Are you concerned COVID-19 will create significant challenges for your or your customer’s business? If your business is affected, would you describe the impact as marginal, major, critical or fatal?

Like the ANZACs, many of us find ourselves fighting an “uphill battle”.  The marketplace has changed and as credit professionals it is incumbent on you, as the custodians of your businesses’ cash-flow, to change as well.  There are some simple things you can do, to reshape your operations during the crisis period:

  • Assume all your customers are impacted (positively or negatively) and re-engage your risk profiling techniques.
  • Revisit your trading terms and credit limits, to reflect the changes to enforcement options available during the crisis.
  • Triage your ledger and report high risk customers up the “chain of command”. It’s better to miss out on the margin in a high risk sale, than to create a bad debt.
  • Use your customer contact to feedback Intel to sales teams and management about the key pressure points being felt and any changes to products or services offered.

 

Recently I have spoken with a party supply importer, wholesaling to independent retailers.  Talk about a three-pronged strike – supply chains disrupted, stock holding risk and customer distress.  The business has taken steps to operationally restructure, utilising its network to provide personal protective equipment and sanitiser, using existing trade facilities to acquire the products; and then mitigated the trading risk by requiring 50 per cent deposit and the balance on COD terms.  The key objective being to survive during the crisis with the best chance of preserving its business and asset value accumulated pre-crisis.

 

The important point is that there are options – and you don’t need to stick to the plan you started with. I’m sure the ANZACs changed their strategy many times as the conditions of war changed in order to bring about their best chances of success. And as we’re in a time of unknowns, it makes sense to gather as much intelligence as you can and adapt your business plan accordingly.

There are also some very good reasons why your customers shouldn’t delay if they’re considering insolvency or restructuring. Here are some:

The market value of many business assets has been adversely impacted. By holding on too long, the reduced value of these assets will only lesson return to creditors, once a viable restructure is no longer available. 

This crisis may not be our fault, but it is our responsibility.  Support for those customers who approach their creditors early, acknowledging the issues they are facing and providing a clear and thought out strategy to survive, should be prioritised.

If a business had accrued unpaid liabilities before the crisis, it’s unlikely to survive - even with government support.

Accessing the Fair Entitlements Guarantee Scheme (FEG) for employee entitlements takes time, so acting now will offer staff a quicker solution.

Any delays in action may also exacerbate liabilities that may be supported by personal guarantees. Continued inaction by customers may be devaluing your security position via personal guarantees.  And if you don’t have personal guarantees, as the pressure builds you may find customers deferring your liability to deal with those supported by personal guarantees.

 The ANZACs also had more concerns than the enemy opposite them, such as malnutrition, dysentery and mental trauma.  Likewise, a business in a time of crisis may have other issues indirectly affecting their performance, such as the loss of key staff, competitor re-positioning or business model redundancy.  The market is likely to have changed once this crisis is over and the old normal is undoubtedly gone.

 Acting early also enables businesses to protect or limit their valued suppliers to ongoing debt exposure.

Another point I’d like to mention is the issue of mental health implications for those trying to deal with the effects of COVID-19 on their business. Again, dealing with a problem early can offer clarity and play a major role in helping to reduce stress and anxiety.

The ANZAC spirit is one where Australians come together to help each other and to let those suffering know that they are not alone. While these are dark times for many, I feel the ANZAC spirit has been very much on display, not only with our friends and family members but also with the businesses we deal with in our every-day lives. My wish is to see as many businesses as possible survive these trying times and would ask each of you to think now to ensure your business is doing all it can to emerge stronger after this crisis passes.