How long, how deep and how bad?” are all questions that business owners are all grappling with in this uncertain economic climate. What I think we can assume is that this recession could be bigger than The Great Depression in the 1930s and the biggest since the Industrial Revolution (250 years ago).
Having been hit hard by the Global Financial Crisis (GFC), banks have been challenging in recent years to deal with. Banks have had tighter Loan to Value Ratios (LVRs) and limited funds available for borrowers due to strict capital requirements from the Reserve Bank. This was to ensure there was plenty available for a rainy day. Now that rainy day has arrived.
Our financial system is in good shape, with our trading banks having lots of capital and plenty of cash to help out.
The government has announced a $12.1 billion support package, which includes wages subsidies to assist struggling firms, with the promise that this is just the initial offerings.
The Reserve Bank however, has announced that it is ready to intervene in financial markets and lend an unlimited amount of money to banks. The Reserve Bank said it will lend to banks for up to 12 months to ensure that the borrowing costs remain low, ultimately helping banks to keep interest rates low.
Interest rates are at their lowest, with the Official Cash Rate (OCR) being slashed to a record low of 0.25% last week. This will mean that there is more cash available to businesses and households to focus on essential matters, as less being paid in interest payments.
Eventually the coffers will need replenishing, so how will the Government do this? You guessed it, by raising taxes. But let’s not concern ourselves with that at this point. Let’s focus on the now, how do we get through this deep recession?
What tools can cash-strapped businesses implement for their survival?
NOTE: THIS IS AFTER PREPARING THEIR CASHFLOW FORECASTS TO REPRESENT THE CURRENT ECONOMIC CLIMATE WITHIN WHICH THEY ARE TRADING
Make contact with your trading partners:
· Talk with your accountant
· Talk to your bank
· Talk to customers
· Talk to suppliers
Communication with these stakeholders is the key to reasonable outcomes. A conversation with your suppliers such as “we may not be in a position to pay this week, but by next week we will have more funds arrived” can go a long way in maintaining relationships and continuity.
Options to discuss with your bank include:
1. Reducing or suspending principal payments on loans and temporarily moving to interest-only repayments
2. Helping with restructuring business loans
3. Consolidating loans to help make repayments more manageable
4. Requesting access to short-term funding, such as overdraft facilities.
Working with your trading partners is the key to any successful business relationship and survival outcome. Let your partners in to work with you, communicate with them. Make contact with your accountant and plan for what may happen. Burying your head in the sand will only result in calamity.
If you need help preparing a cashflow forecast or facilitating these conversations please get in touch with us, so we can help you navigate these challenging times.
