Can Your Business Survive Without JobKeeper?

Much of the financial media is now correctly focused on what will happen to the economy and businesses when JobKeeper, debt relief from banks, and rent relief from some landlords all end about the same time for many businesses at the end of September.

Fortunately we are already seeing some announcements of some targeted and limited extensions to these programs, but no prudent businessperson should be relying on that as their plan for survival.

Most businesses that have qualified for JobKeeper have been receiving it for about 2 plus months now and hence probably have an approximate idea of how profitable and cashflow positive they are with that support.

The critical question now is what would your finances look like without the JobKeeper subsidy?

That may not be a straightforward question as your sales may not have recovered as much today as they hopefully will have by the end of September, especially as not all COVID19 restrictions are removed and if your business benefits from inter-state and certainly international travellers, it could be beyond September before those sales return.

However, businesses have probably got enough data to make an educated guess on where their finances are tracking and whether their existing operation – with its current cost structure – can  survive from October onwards.

We would highly recommend doing some financial “stress testing”. This is what many of the world’s central banks forced our banks to do in the months after the GFC. It basically consists of examining how your business would fair in a harsher business environment. For most businesses that will be dealing with falling sales, but in some businesses, it is sharply rising costs. In the post-September COVID-19 world, it could be both.

The first order effect every JobKeeper business will suffer is a significant portion of your wage bill will once again have to be fully supported by your own cashflow. This will vary from business to business. If you have a majority of employees who earn well over $1,500 a fortnight, then you have still been paying the bulk of your labour costs and the end of JobKeeper may not be so much of a shock. If you have a significant number of employees earning approximately $1,500 a fortnight or not much more, then JobKeeper may well have been going close to eliminating your wage costs. When JobKeeper stops there could be a significant shock to your business.

The second order effect many businesses could face is falling sales, because other businesses have been very badly affected by the end of JobKeeper. They will reduce their spending and so will many of their employees, who may have been laid off again.  So it may be if you simply analyse your figures currently and remove the JobKeeper subsidy, you are still comfortably profitable but unfortunately you may not be able to relax, as your sales may be sharply lower after September. Hence you will need to stress test for both removal of JobKeeper and possible sales reductions. We would recommend building a cashflow budget, typically in a spreadsheet, so you can examine a number of scenarios.

We would recommend doing at least the following:

  • Business as usual but no JobKeeper
  • Sales down 10% with no JobKeeper
  • Sales down 20% with no JobKeeper
  • Sales down 30% with no JobKeeper

That is NOT an exhaustive list, it may be that in your industry you need to contemplate a 50% reduction in sales.

If you are currently taking advantage of debt relief from your business or home loans from the bank you will need to also factor that in. Likewise, if you have a reduced rent arrangement with your landlord.

Having done those projections if they show you do indeed have a problem, you will need to examine very uncomfortable things like retrenching staff. Be careful here to remember that you may have to pay out entitlements at this point. Many businesses get caught out when they must go into survival mode and the changes they need to make to survive actually make cashflow pressures worse in the short term. People that have been through a business rescue or turnaround invariably talk about how long it took to “turn the ship around”. Likewise you will often hear people who lost their businesses or liquidators lament ‘’if only they had acted sooner”.

It is also wise to remember that a reduced business in terms of sales, can still often make the same amount of profit and a business owner’s financial position can be saved. In simplified terms if before the crisis you had a business with sales of $1.0m and costs of $800K making a $200K profit; and now sales have dropped to $800K then obviously to maintain profits at $200K you need to cut costs to $600K. Some of this will happen naturally as you will need to buy in less stock to sell or need far less casual labour. Other reductions will be far more difficult and you may have to retrench some employees who may even be friends, but it is crucial to remember there is almost certainly a profitable business model inside the new reduced revenue numbers.

It is perhaps easily said but you just need to do what is necessary to get there. You may also have to recognise it is better to retrench say two employees and save the other five, than for all of you to lose your livelihoods. Furthermore, by keeping your business alive you may be able to give jobs back in 6 months time, to those two employees you had to let go.

It may well not be the time just yet, to make these changes but it is very useful to be formulating these up well in advance of them being required. It will also impress your bank manager how organised and prepared you have been and greatly improve your chances of securing that bridging finance you might need whilst the ship changes course.

If you would like any assistance in drafting up these scenarios RWK Accountancy would be very happy to help you.

Bunbury: 08 9721 8218

Dunsborough: (08) 9755 3049

Author: Kingsley Smith CA, Director. Find out more about the RWK Team here.