COVID 19:

 BUSINESS IMPACTS AND

 CONSIDERATIONS

owners and investors are considering the potential impacts on their businesses and investments; and are therefore prepared for all scenarios.

We believe the key areas business owners and investors should initially be across are:

• Ability to continue running the business if staff are required to work from home;
• Funding options to provide access to additional cash if required;
• Reviewing customer and supplier payment terms;
• Reviewing employment agreements, leave and staffing levels;
• Reviewing current insurance coverage; and
• Assisting with staff well-being through this difficult period.

We will be reaching out to clients individually around a number of these issues over the next couple of weeks, but if you would like to discuss sooner, please contact the All Accounted For team. 

CONTINUING TO RUN YOUR BUSINESS

Should COVID-19 spread through New Zealand, there is a risk that one or more staff members may need to self-isolate for 14 days and/or that businesses and schools may be required to close, regardless of whether your staff are actually sick.

Every business should therefore investigate alternative working arrangements should this situation arise.  While having staff work from home could be a viable option, businesses need to determine if those staff have access to the necessary systems and equipment.  We would recommend that all business assess the ability for staff to work from home and stock-take the requirements to enable this, IE: laptops, internet access, etc.

Currently, people are required to self-isolate for 14 days when returning from international travel, which could impact on businesses. We would recommend ceasing all non-essential staff travel, including domestic unless absolutely critical.  Many meetings and conversations can be undertaken via the likes of Skype/Zoom/Hangouts, etc. or even by the old fashioned telephone.  The likes of a Zoom subscription is just USD$15 a month.

For further guidance and information around managing your workplace through the current situation, visit the Employment New Zealand website.  We have provided the link below:

FUNDING OPTIONS

With the expected significant downturn in economic activity, we are recommending that business owners and investors review their worst case scenarios and put in place additional funding facilities now to meet potential future cash flow requirements.

While the easy option is to reduce staff, move to smaller premises or reduce assets, this could result in future issues when the economy recovers.  We would recommend that business owners and investors plan their cash flow needs based on the worst case scenario, to determine the level of funding needed to ride out the economic downturn; say for an initial period of 12 months that would allow the retention of critical infrastructure, including key staff.  This is something we can assist business owners and investors with, through the running of forecast scenarios.

The Reserve Bank today (16 March 2020) deferred its planned capital requirement changes for the trading banks, thereby freeing up $47bn for the banks to lend.  This is to ensure additional funding is available for businesses and investors as it is needed.  Banks will however only lend to businesses and investors with equity and with the ability to service any additional funding.   Forecast scenarios will help to prove the funding serviceability.

Income tax terminal payments are due 7 April 2020, while the next provisional tax and GST payments are due for most businesses on 7 May 2020.  There is the ability to free up cash flow by funding those tax payments.   Income tax payments can be managed via tax pooling, thereby providing additional time to make payments.  We recommend Tax Management New Zealand, given their flexibility around payment options and lower interest rates.  With regards to GST payments, an instalment arrangement can be set up directly with the Inland Revenue, which we can assist with, thereby spreading the GST payment out for up to 24 months.

Other options that are available and should be considered by business owners and property investors to assist with funding and cash flow are:

• Extending flexi-facilities if equity allows;
• Should fixed interest rates fall further, considering breaking fixed term loans, adding a break fee to the loan balance and thereby reducing the repayment amounts;
• Extending the term of any existing lending;
• Changing lending arrangements to being paid on an interest only basis; and/or
• Request repayment holidays (usually a maximum of 3 to 6 months). 

PAYMENT TERMS

Even if your business is not directly impacted by the current situation, it is likely to feel the secondary effects of the declining economy, particularly when people unfortunately start to lose their jobs and cash becomes harder to secure.

Outside of the funding options discussed above, one key area of focus should be around the business payment terms, both for customers and suppliers. 

If using 20th of the following month as a standard term for invoicing, consider moving to 7 day or 14 day terms, and also requesting deposits to help manage cash flow.  The Government has a strong focus on payments to small and medium sized businesses, to ensure they are not unfairly disadvantaged by unfavorable terms from large corporate's.

Conversely, if you find yourself in a position where the business is not able to meet your supplier invoice payment terms, it would be worth having a discussion with suppliers early to negotiate extended terms.  Pre-empting that discussion with a supplier will likely deliver a better outcome and hopefully ensure continuity of supplies/services, as opposed to simply ignoring overdue reminders. 

EMPLOYMENT & LEAVE CONSIDERATIONS

Annual Leave - Undertaking a review of annual leave will determine the maximum leave liability a business would be required to pay out, due to reduced staff working hours or as a result of restructuring the business. If businesses require staff to take leave as a result of declining sales, the staff are entitled to use annual leave.  Businesses needs to cover those costs regardless of current financial performance and needs be factored into cash flow forecasts. 

Sick Leave Entitlements - Should COVID-19 spread through New Zealand, there is a risk that one or more staff members may need to self-isolate for 14 days.  Businesses may then need to pay self-isolating employees, while also needing to pay a replacement staff member.  A review of the accrued sick leave is recommended, along with developing a policy around how additional leave requirements are managed, if a staff member has exhausted their sick leave entitlements.

Review of Staff Employment Agreements - All staff agreements should be reviewed for clauses such as guaranteed minimum hours and trial periods; redundancy clauses should also be reviewed.  Although sourcing and retaining quality staff is a challenge for all businesses, if there is insufficient revenue to cover staff costs, then staff hours will need to be reduced.

Options to consider include - reduced hours, reduced days, reduced pay rates, not replacing resigned staff and/or undertaking redundancies.  While redundancies would generally be the last resort, a process needs to be followed in order to avoid potential personal grievances.  Obtaining employment advice is recommended if redundancies are required.

If the business is able to retain jobs or provide additional support to staff even when their entitlements are exhausted, it would likely generate significant future loyalty and ensure the business is in a prime position to benefit when the economic recovery commences. 

INSURANCE COVERAGE REVIEW

Given the concerns around the health risks associated with COVID-19, a number of events have been cancelled or postponed.  There is now the very real risk of schools and businesses being closed in the future.  We have seen this in Europe and parts of the United States.

Now is the time to review your business insurance policy to understand:

• whether there would be any coverage for business interruption as the result of any health related enforced closures,
• key person coverage for staff absences over extended periods, or
• income protection for you in the event of a long period away from the business. 

Our understanding is that there is unlikely to be business interruption insurance coverage, as anything associated with COVID-19 would be considered a known “Infectious Disease”.  However, if business have key person or income protection insurance, it would likely provide coverage in the event staff need to be away from the business for an extend period of time due to ill-health.

If you are unsure, we would recommend contacting your business insurance broker to gain clarification around coverage.  If you do not have key person or income protection insurance in place, we can provide contact details for a recommended broker, that would be happy to discuss options; it's not too late to put in place.

XERO ASSISTANCE PROGRAMME - SUPPORTING MENTAL HEALTH & WELL-BEING

STAYING INFORMED

The below link is a useful resource from international business consultants, McKinsey & Company,.  The article is constantly being updated with new information as it comes to hand.  The article also helps to provide some perspective around COVID-19.

WE ARE HERE TO HELP

If you have concerns about the COVID-19 impacts on your business and would like some assistance navigating your way through these difficult times, please contact the All Accounted For team.

Email: admin@aafl.nz

Phone: 04-970-1182