Business recovery: Transparency is key
In our recent article The road ahead: Now is the time to seek counsel we highlighted the first of the Seven Cs of Business Recovery: seeking Counsel. Here, we look at the second step: Communication.
When the economy goes from a position of strength to one of uncertainty in a relatively short time, the pressure on your business is real and overwhelming, explain Royce Prude, Cary Mailandt, Frank Walker from Baker Tilly in the US.
At front of mind for many businesses will be assessing and applying for available government aid and stimulus packages, with extensive financial packages including the likes of wage subsidies, subsidised or low-interest loans and rent relief on offer around the world.
"Understanding your cash flow should be a priority as you navigate your options", explain Prude, Mailandt and Walker.
"It takes cash, not book earnings, to meet your obligations and survive economic downturns. Using traditional accounting and finance metrics such as net income, net operating cash flow, and earnings before interest, tax, depreciation and amortisation (EBITDA) can be misleading and dangerous during times of declining sales and economic calamity."
"We know this [COVID-19] is going to impact the income statement," explains Ken Tammadge a Tax Partner with Baker Tilly Canada and Office Managing Partner in Ottawa.
"Where the focus should be, however, is on the balance sheet. I think that’s where you need to be concerned. Your ability to continue operations, so that's looking more at the balance sheet side of the equation and asking: What is my line of credit and what's the ability to obtain financing? Knowing the net income is likely to drop for the majority of businesses in some way, shape or form. Cash flow is going to suffer. There’s a bit of a switch from the income statement to the balance sheet."
Neil Hughes, Managing Partner at Baker Tilly in Ireland who developed the Seven Cs of Business Recovery framework, explains the importance of devising a comprehensive and transparent plan to work through your cash flow issues then relay this plan to those that are owed money.
"Have you been completely honest and transparent about your business’s performance with the people to whom your indebted to? If not, now is the time. Communication is key when it comes to securing their support in your recovery plan," explains Hughes.
"Don’t fall into the trap of creating a hierarchy of creditors; all are important to your survival prospects.
"Being honest with your creditors about the condition of your business is likely to a) generate goodwill and b) take the pressure off which will in turn, help you make better decisions.
"It is often pride that deters a business owner from being completely honest. There is always the risk that the truth may lessen a creditors’ confidence. In fact, confidence is instilled by being upfront and honest. The more likely scenario is that those who are owed money will appreciate you bringing them up to speed on how your business is performing. You will be surprised with the goodwill you may receive in return. Maintaining your integrity will buy you more time. And with time, many things become possible."
The importance of communicating with the taxman, lenders, landlords and suppliers
Lenders
In the previous article, we looked at the potential of seeking counsel from your funder, whether it be alternative debt providers or equity players. It’s important to communicate with them frequently, and early in the process.
As your difficulties intensify, try to give them notice of potential problems. For example, if you are about to be hit with a significant bad debt, make sure you inform them.
"Develop advice from your accountant and lawyer into a plan that includes financial projections and present this to your lenders. Demonstrate an understanding of why your business is struggling; develop an idea of how it can recover and provide a realistic timeframe in which you can achieve this.
"Results are achievable, especially if you have developed and maintained a strong and honest relationship with your lenders," says Hughes.
Dealing with tax authorities
The tax authorities may constitute your biggest ongoing creditor.
When your business is struggling, it is important you are aware of the key people to deal with in your local tax authority. Developing good communications with the tax authority means submitting your tax returns on time, even if you cannot pay the liability there and then.
Not submitting your returns will flag you as a non-compliant taxpayer and will mean that you are more likely to be audited. Contact the tax authority and advise why the payment has not been included; set out when it is likely that the liability declared on the return can be paid.
Do whatever you can to ensure substantial undeclared arrears do not build up.
Landlords
Open communication and renegotiation with a willing landlord are important, explains Hughes.
"Landlords are a significant creditor to most businesses. Lack of communication with a landlord can lead to a crisis for a business. Think of the relationship with your landlord as mutually beneficial rather than adversarial.
For a multi-unit business, if a particular unit is chronically loss making, you may need to consider formal restructuring options to repudiate and exit from the lease on that unit. Acting quickly and decisively can be the difference between survival or closure if there is a particular outlet of your business that cannot be saved."
Suppliers
During a significant downturn, many suppliers will begin to seek COD payment terms, leading to an increase in administration for the accounts payable people in your business. Do everything you can to work with your suppliers and invest in the admin staff needed to juggle the regular payments to keep key stocks moving; focussing on the lines that you can immediately turn into cash.
Breathing space
Effective communication with the people to whom you owe money to, says Hughes, will allow you time you need to implement the next stage of your recovery plan.
The article "Business Recovery: Transparency is Key" was first published on www.bakertilly.ie on 29 April 2020. The article "The Importance of Cash Flow During Uncertain Times" was first published on www.bakertilly.com 26 March 2020. Comments from Ken Tammadge were first published on www.obj.ca on 17 March 2020. All content has been reproduced with the approval of the authors.
