Preparing your business for COVID-19 and essential key points for businesses in financial distress

Many businesses are suffering financially, with revenues dropping sharply until such time as the virus is contained, restrictions are uplifted and life returns back to normal.

The implications of COVID-19 will cause severe financial distress for many businesses if a proper plan is not set in place to navigate a way to restructure their affairs.

Here are nine key points that are important to consider in working through these challenging times:

Take a reality check

Are you already in financial distress? This may a tough reality to face, but it is an essential starting point. Many businesses in financial distress are in denial. They stop looking at their bills and stop reading angry emails from creditors.

The first step is admitting that your business may be in trouble and that something needs to be done.

Acknowledging your situation, looking it squarely in the face, and taking action is infinitely preferable to putting your head in the sand.

Ensure that your books and records are up to date

It is essential that you determine your business’ financial position, and in particular the extent of your assets, liabilities and monthly expenses.

You need to know who your creditors are, what you owe them and when the amounts owing will fall due. You also need to check who your debtors are, what they owe you and when they are going to be able to pay you.

Do the insolvency and liquidity test and determine if you are financially distressed

The Companies Act 71 of 2008 provides many helpful tools for directors to apply in these challenging times. 

A company satisfies the solvency and liquidity test at a particular time if, the assets of the company (fairly valued) equal or exceed the liabilities of the company (fairly valued); and it appears that the company will be able to pay its debts as they become due in the ordinary course of business. Directors would need to consider the company’s financial information and financial statements.

If it appears to be reasonably unlikely that you will not be able to pay all of your debts as they become due and payable within the immediately ensuing six months, then you are financially distressed.

These tests must be applied more carefully and prudently, especially now. If your company is financially distressed or if it does not pass the solvency and liquidity test, it is crucial that steps be taken to restructure its affairs.

Talk to your insurer

Business Interruption cover is an important insurance offering in both short- and long-term insurance for businesses. Consult with your broker and/or insurer to check whether you are covered under your insurance policy.

If you are not, this gives you the opportunity to address the lack of appropriate cover in order to mitigate the potentially disastrous results a pandemic such as COVID-19 or other similar infectious disease could have on your business in the future.

Talk to your suppliers, creditors and customers

Have an open and honest discussion with your suppliers and creditors and see if you can work out an agreement on the best way forward. Most people are willing to work with you if they believe that you will eventually pay what you owe. Keep the lines of communication open. If you are not transparent with major creditors, the environment may become hostile.

It is also important to concentrate your efforts on your business’ best customers. Focusing on your most reliable, profitable customers can be an effective method of improving your cash-flow.

It is important to gain the support of your bank by being open and transparent about the situation you are in. If you proactively approach your bank with a sound plan to improve your financial situation and repay that loan, the bank is likely to work with you.

It is also in the bank’s best interest to have you work through these challenging times so that you remain a customer in the long-term.

Call in outstanding debts

It is often the case that businesses allow outstanding debts to go unpaid for significant periods of time, potentially resulting in cash-flow problems. A growth in accounts receivable is a common cause of a company’s insolvency issues.

One way to deal with late payments is to contact your debtors with a reminder notice. If they still fail to pay, consider handing over the debt for formal collection. In future, you could offer early payment discounts to increase the flow of cash into the company.

Cut costs

Many businesses experience cash-flow problems due to excessive spending. This can be on salaries, equipment, marketing or other operating costs. One way to increase cash-flow is to cut costs and reduce unnecessary spending. This may mean disposing of non-key assets, letting go of staff or cutting the marketing spend.

Make a list of all your expenses on a spreadsheet and go through it carefully (with your accountant if necessary). How much can you save and where? You could consider creating a document called a ‘break even analysis’ which tells you the minimum sales level required in order not to sustain a financial loss.

Your mental health is important

It is a very stressful experience to have a business in financial distress and it can take a personal toll on you. During these tumultuous times, it is important that you look after your emotional, psychological and social well-being, as it affects how we think, feel, and act. It also helps determine how we handle stress, relate to others, and make choices in our businesses.

Chat to your doctor or mental health professionals if you are in need of help.

Get help from insolvency specialists

You may be considering your options and wrestling with the survival of your business. Getting qualified help is likely to save you money and also your business in the long run.

If you think your business is in financial distress and you need some help with a plan of action, then our team at CDH are the best people to talk to. Our team are experienced specialists in business rescue, restructuring and insolvency law. We would be happy to have an initial consultation with you to help you understand your business’ financial position and what options you have available going forward (for the duration of the lock down period, all consultations will be conducted online). We can and want to help you during these trying times.