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Strategies to survive a downturn

As we all know, there is significant global economic uncertainty as countries deal with COVID-19, and the steps taken to control it. Most countries are expecting to enter recession, if they are not in one already.

What is the current situation?

The good news is that the economic situation in New Zealand may not be quite as severe as expected, especially now we have moved relatively quickly to Level 1 restrictions. Retail spending has recovered to almost pre-COVID levels. The high numbers of job losses seen during April and May have eased. There may be a second wave of restructuring when the government wage subsidy runs out in June, although the extended wage subsidy provides more room for businesses to get to grips with the new normal.

Treasury forecasts that the New Zealand economy faces a relatively short and very sharp recession over the coming year, with unemployment peaking at 9.8 per cent, before the announced government spending stokes growth. GDP is forecast to return to pre-Covid levels in the second half of 2022.

The construction sector will have an important role to play in kick-starting the New Zealand economy. There is funding for ‘shovel ready’ projects across urban centres and the regions, and the residential market should be stimulated by the Government pledge for 8000 new homes in the 2020 budget.

 

How does any downturn affect your business?

The disruption to global supply chains and the disruption to non-essential businesses caused by the lockdown has badly affected many businesses. You may be dealing with a lack of cashflow and having to make difficult decisions regarding retaining your staff in the light of on-going uncertainty.

The need to protect your employees’ physical and mental health may result in lower productivity and hence delays in activities. If you were reliant on materials sourced from overseas, you may be subject to shortages, delays and increased costs.

 

What can you do to protect your business?

When times are tough, it can be easy to plough straight in, trying to cut costs and restructure staff. These are difficult decisions at the best of times but, when under intense pressure, it is even more important to base your strategies on good information.

Take time to assess your current situation:

  • How tight is cash?
  • How do your forecasts look? If you operate in construction or services, pull together a sales summary showing current jobs, confirmed jobs that are likely to go ahead, and any tenders/proposed jobs.
  • Consider what expenses are necessary and any commitments that can’t be avoided such as equipment purchases.
  • If your supply chain is disrupted, identify sources, and adjust project schedules and contracts accordingly.

Use the information that you have gathered to prepare a cash flow forecast for the best, base and worst case scenarios. You may feel that your current environment is so uncertain that there’s no point trying to forecast. That’s where scenarios are useful:

  • Worst case is based on your confirmed sales and not making any changes to your costs.
  • Best case assumes that you win all the projects you have tendered.
  • Base case assumes that you win some of the tenders and make some changes to reduce your cost base.

Then work out what you can do to meet your commitments. How can you increase sales? Are there opportunities to move into different markets? Are there any sources of funding that you haven’t tapped? Consider the Capability Development Voucher Scheme to fund expert advice on saving and growing your business.

Have you approached your Bank to understand the options for overdrafts and loans? Your landlord may agree to temporary reductions on your rent. Or you may need to use the Business Debt Hibernation Scheme, which allows your business to put a hold on existing debts for up to seven months to get back on its feet, rather than being subject to liquidation.

Are you taking advantage of tax concessions available to you? Ask your accountant about the Wage Subsidy Extension, Loss Carry Back Scheme, changes to commercial and industrial building depreciation (if you own premises), the increased threshold for low value assets and the R&D tax credit.

Once you are through the short-term crisis management, consider strategic moves to grow your business. Look for new opportunities, such as servicing the expanding film and production industry. Is there an opportunity for you to use digital solutions or e-commerce?

It’s critical that you figure out how to protect and increase revenues, not default to just containing or cutting costs. Understand your supply chain, and if you are relying on product from overseas, consider seeking alternative local suppliers. There may be an opportunity to form a strategic partnership with preferential pricing and using locally sourced product could be utilised in your marketing.

In summary, base your decisions on well-researched information, particularly cash flow forecasts and sales forecasts, and consider whether any of the Government assistance on offer can help your business.

For further information get in touch with your local Baker Tilly Staples Rodway adviser, or contact Tracy Hickman at tracy.hickman@bakertillysr.nz.

DISCLAIMER: Our team is dedicated to helping you continue with business as usual, as much as you can. Information on government help is changing constantly and within hours of articles being added, the specifics may be out of date or only partially accurate. While we endeavour to keep this website accurate and current, our top priority is providing our clients with dedicated and relevant personal advice. If you need specific and up-to-date information, please seek help from your usual advisor directly.

No liability is assumed by Baker Tilly Staples Rodway for any losses suffered by any person relying directly or indirectly upon any article within this website. It is recommended that you consult your advisor before acting on this information.

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