How global health can affect your company’s financial future

The Coronavirus outbreak has become a strong reminder that, regardless of your own health or financial stability, national and global crises can directly and indirectly affect your finances.

This is seen as global travel bans, social distancing policies and essential service restrictions that prevent certain businesses from operating at optimal levels.

Tied with a drastic reduction in tourism, local population movement and reduced business activity as companies protect their financial stability, you may be facing long-term damage to your cash flows, making your company insolvent.

Should this occur, you may be facing company administration.

How Coronavirus has affected Australia’s economy

Impacts of COVID-19

Since March 2020, businesses across Australia have felt increasing pressure as a result of COVID-19. To get a sense of the national impact of COVID-19, the Australian Bureau of Statistics surveyed 3,000 businesses and found that almost half of the Australian businesses surveyed (49%) had been affected…and this was reportedly before the Australian Government’s announcement of Phase 1 Social Distancing Measures.

 

Experienced impacts as a result of COVID-19. Source: ABS

Adverse impacts of the pandemic include reductions in local demand, which was the most common impact (82%) experienced as a direct result of non-essential travel restrictions and social distancing which was introduced to help ‘flatten the curve’ and limit the virus’ spread across the country.

 

Businesses adversely impacted by Coronavirus (COVID-19), current and expected, by type of impact, March 2020. Source: ABS

Since March, more than a third of affected businesses also experienced staff shortages (36%). Due to the ongoing travel and interaction restrictions, 59% of businesses expected to experience staff shortages in coming months.

COVID-19 impacts

Australia’s Accommodation & food services sector has been the most affected by adverse impacts of COVID-19, with 78% of businesses (or more than three quarters) already reporting impacts and 96% of businesses reporting that they expected impacts in coming months.

The ongoing pandemic

Cash flow has become an increasing issue for businesses as the pandemic forces new behaviours. Without a consistent stream of customer spending, or new projects or client contracts, two thirds (66%) of Australian businesses reported that their turnover or cash flow had reduced.

When cash flow is reduced, many businesses find it difficult to maintain a steady rate of operations. Nearly half of businesses (47%) have been forced to make changes to their workforce arrangements as a result of COVID-19. These arrangements include:

  • Temporarily reducing or increasing staff working hours;
  • Changing the location where staff worked (including working from home); and
  • Placing staff on leave.

Many businesses have also been forced to restructure their business model to stay afloat. Two in five businesses (38%) have changed how they deliver their products or services, including shifting to online services, and over a third of businesses have renegotiated their lease and rental arrangements and a quarter have deferred loan repayments.

 

Proportion of businesses trading that made changes to workforce arrangements as a result of COVID-19. Source: ABS

Looking ahead – business outlook as a result of COVID-19

Restrictions have begun to ease in several states and politicians across Australia, from both federal and state levels, are trying to gauge when the country can gradually attain a point of pre-COVID-19 familiarity.

Slowly but surely, life is expected to return to normal. However, the economic effect of self-isolation and restrictions on travel and non-essential retail is expected to leave a significant dent in many businesses, as the return of ordinary consumerism and trade may not be quick enough to recover from the debt incurred during the pandemic.

 

Anticipated adverse business impacts due to COVID-19, by industry. Source: ABS

The ABS said that almost three quarters of Australian businesses (72%) reported that reduced cash flow is expected to have an adverse impact on business over the next several months. Reduced demand for goods and services was expected to impact about seven in ten businesses (69%), while two in five businesses (41%) could face significant challenges in paying operating expenses.

 

Expected impacts to business in the coming months. Source: ABS

All data, graphs and statistics were sourced from the Australian Bureau of Statistics and its range of existing and ongoing statistical products produced exclusively to measure the impacts of COVID-19.

What does it mean if Coronavirus leads to company administration?

If the pandemic has caused your company financial hardship that may not improve in the short term, then you may decide that the company should be placed into administration. An administrator will take control of the company and attempt to reach a compromise or arrangement with creditors, which may save the company, the business and jobs while maximising the return to creditors.

The process gives the appointed administrator the opportunity to review the company’s financial situation and see if which option is best:

  • Accept a proposal for a Deed of Company Arrangement;
  • End the company administration and pass control of the company back to the company directors; or
  • Liquidate the company.

 

However, as a result of the ongoing effects since the initial Coronavirus outbreak, temporary legislation regarding liquidation was introduced by the Australian Government on 24 March 2020 to alleviate financial pressure on companies.

These measures includes increasing the minimum amount of debt a creditor can rely upon to file a winding up application and extending the timeframe that a company has to respond to a creditor’s statutory demand. The temporary amendments also included measures providing limited relief from insolvent trading provisions.

Click here to find out more about the new temporary legislation.

Should the economic effects of Coronavirus cause your company to face administration, it is important to speak to one of the professional insolvency experts at Insolvency Guardian for more information about your situation and your options.