2024 Year end tax planning and financial reporting guide - unlocking tax and reporting insights for year end success > Download the full guide
COVID-19 | Business hibernation strategies
6 April 2020 | Minutes to read: 4

COVID-19 | Business hibernation strategies

By Manda Trautwein

Businesses around the world are finding themselves in unchartered waters.

COVID-19 is having an unprecedented effect on business everywhere. For some businesses their supply chains have been impacted while for others, demand for their product or service has entirely dried up overnight.

In Australia and New Zealand, the Governments have imposed a range of restrictions including many social distancing measures to kerb the spread of the Coronavirus.  This has had the unfortunate effect of forcing a variety of businesses to shut down altogether and many others have had to implement large scale work-from-home measures.

In challenging times, we are often forced to look outside the square to problem solve.  This change in mindset, whilst driven out of necessity, may well result in COVID-19 paving the way for an unprecedented surge in innovation and digitalisation globally as we all work from home. Apparently, Isaac Newton formulated his theory of gravity when he was working from home due to the plague.  It was when he watched an apple fall from a tree in his garden that he had his light bulb moment (metaphorically of course as light bulbs had not yet been invented!).

We are already seeing some businesses taking active steps to pivot their business model to adapt to the rapidly changing landscape. For example, retailers who have shut their stores are now able to refocus their attention on driving online sales and improving their online offering. Gyms are moving to web-based exercise classes. Dyson, known for its vacuum cleaners and air purifiers, is re-deploying its resources to produce ventilators for UK hospitals.

Even at a more personal level, it is not uncommon to hear of individuals who have gone on, post-redundancy, to discover an entrepreneurial spirit they never knew existed, mostly because they had no choice. These “reluctant entrepreneurs” generally have significant managerial and operational experience which often leads to greater financial success.

Unfortunately, despite their best efforts, many Australian businesses that were entirely viable pre-Coronavirus, are still battling for survival whilst simultaneously trying to save as many jobs as possible. This has led to many businesses effectively placing themselves into hibernation mode; a plan to wait out the storm and give themselves the best possible chance of emerging on the other side, whenever that might be.

Our advice for businesses who are thinking of implementing a hibernation strategy is to focus your efforts on four key areas:

  • Your workforce
  • Your landlord(s) and/or other major suppliers
  • Your bank
  • The ATO & State Revenue Offices

Your Workforce

For most companies, their workforce is their single biggest asset, yet it is also generally their single biggest cost.

Before layoffs, consider some less obvious options for reducing costs in this area.  For example, introducing a four-day work week which could reduce your staff costs by 20%.

Have an open dialogue with your employees. Some might agree to working half-time if they know that doing so will save jobs.

Others might have large accrued leave balances that could be taken. Whilst this strategy does not conserve cash in the short-term, it does at least reduce the business’ liabilities.

As a last resort, consider standing down staff or doing layoffs. Also consider whether you may still be able to access JobKeeper payments in Australia (discussed later) for affected employees or leave subsidies in New Zealand.

Your Landlord(s) / Other Major Suppliers

In terms of dealing with landlords and/or major suppliers, we suggest being on the front foot and opening a dialogue with them early on.

Many businesses have had great success in negotiating rent free periods, rent reductions or rent deferrals with their landlords. While some businesses in Australia have simply stopped paying their rent, taking advantage of the temporary moratorium on eviction for non-payment of rent announced by the Government.

Similarly, businesses should seek to understand what is happening in their supply chain. You may be able to negotiate with suppliers to obtain more generous payment terms, pricing and potentially renegotiate other contract terms.

Your Bank

For businesses affected by the Coronavirus, now is also a good time to engage with your bank.

All of the big four banks in Australia have openly stated that they will provide repayment holidays of both interest and principal on existing loans for between 3 and 6 months. Business owners should also consider whether this may be available for their personal, investment or home loans. In New Zealand, banks have agreed to give mortgage holders whose incomes have been affected a six-month payment holiday on the interest and principal of their mortgages. The New Zealand government is also underwriting 80% of individual bank loans to eligible SMEs with banks underwriting the remaining 20%.

In Australia, we have also recently seen the introduction of a $250,000 loan guarantee scheme where banks are offering unsecured loans of $250,000 to small and medium sized businesses with no repayments required for six months. These loans are 50% guaranteed by the Government and hence, we understand that banks are taking a “light touch” approach to credit assessment on these loans.

Our advice to business owners is to apply for these loans even if there is not an immediate need.  It is always better to apply for a loan when you don’t need it than when you do need it!

The ATO & State Revenue Offices

Finally, businesses should consider the range of Federal and State Government response measures that may apply to them such as the PAYG withholding cashflow boosts, the JobKeeper Payment and state-based payroll tax reductions/deferrals.

Businesses can also look to vary their PAYG instalments down to take account of their drop in taxable earnings. Depending on your position, you may even be able to claim a credit for PAYG instalments already paid.

The ATO has also indicated that it will provide a range of payment deferrals and low interest payment arrangements in relation to outstanding tax liabilities. Similar measures have been introduced by the Inland Revenue Department in New Zealand.

Regardless of the strategies adopted to survive or even beat COVID-19, we recommend that businesses engage in frequent communication with key stakeholders – including staff, customers and suppliers – through clever and targeted messaging.

For more information on any of the topics above, please contact your local William Buck advisor.

COVID-19 | Business hibernation strategies

Manda Trautwein

Manda is a Director in our Business Advisory division who enjoys working with entrepreneurial businesses who have strong growth aspirations. Manda is a trusted sounding board for clients on strategic business planning issues drawing on her experience in business valuations, mergers and acquisitions and ASX listings to maximise business outcomes and support clients to achieve their commercial objectives.

Read more >
Related Insights