Coronavirus: Six months is too long for a small business to survive

Joanna Brewer, owner of Issus cafe in Melbourne. Picture: Andrew Henshaw

For those still able to conduct business, prepare for a massive change in the way transactions are facilitated.

It’s back to cash on delivery, because the government’s rescue package makes it impossible to enforce payments in the current way.

I will explain how this works below but there is a series of big blows ahead, including the danger that super funds may be forced to quit holdings at depressed prices, creating a downward spiral.

First, all around the land, the government’s labour assistance arrangements are hopelessly inadequate, so enterprises forced to shut or dramatically slow down must choose between slashing staff costs or borrowing from the bank.

If the borrowing is merely to pay wages, then there must be hope that over time the business can generate the funds to repay. If the shutdown was for one or two months — as in China — then it would be possible, but six months is a long term disaster for most enterprises. Accordingly, eventual repayment of any borrowing to pay staff costs must come out of shareholders’ pockets or via asset sales.

Second, in housing markets, there are many buyers around at lower prices, but many homeowners will now withdraw their homes from the market.

Those that have to sell maybe lucky, but many will be forced to sell at lower prices

Thirdly, the superannuation funds’ disaster scenarios rarely included a massive refund in a crisis, so many funds will not have enough cash without selling shares and further depressing the values for members.

And that liquidity shortfall will be multiplied by the looming big rises in unemployment, which reduces contributions.

I warned that those funds that have overvalued non listed assets — and most do — need to quickly revalue them downwards to equate with stock market values or the trustees personally and /or the funds will face endless legal battles over the destruction of value for continuing members caused by inflated payout amounts.

Trustees might be forced to meet their personal legal costs rather than have the members’ fund pay them. As a result, given the very clear warnings, those big fund trustees with overvalued non listed assets (and many are not overvalued despite the market fall) who do not act quickly may be personally bankrupted in coming years, unless they are protected by government legislation.

But the government’s measures mean everyone is insulated for the short term. That’s why cash on delivery becomes vital. Here are some of the measures that cause the change in trading patterns:

• Temporary increase to the threshold at which a creditor can take action to initiate insolvency or bankruptcy from $2000 to $20,000 and giving companies and individuals six months instead of 21 days to respond.

• Relief for directors for personal liability when the company is trading while insolvent.

In total, this means that small debt collection as we currently know it is destroyed unless the person receiving the goods or services has the cash.

My colleague, Terry McCrann details the crisis facing small enterprises clearly.

McCrann uses the example of a business with a turnover of $39m ($750,000 a week) and a wages bill of $26m ($500,000 a week).

“Only someone living in a Canberra bubble could believe that if that business’s turnover has been slashed to zero — to stress, that’s $0 per week — that a payment of $50,000 is going to keep it paying out that $500,000 a week in wages and salaries, week after week for who knows how long.

“And that’s even before you take account of all the other regular costs of a business, like rent, power, insurance, etc.

“The same problem applies as you scale down to smaller businesses with turnovers of $10 million or $1 million, and to those that are losing ‘only’ say 50 per cent or 80 per cent of their turnover” McCrann writes.

In smaller enterprises the owners often personally know the financial position of their staff and those staff are vital for the continuation of the enterprise. That’s why for a four to six weeks shut down enterprises can borrow and take measures to maintain the business. But six months is impossible.

It may be better for employees to allow themselves to be stood down and use the income package. At least they know they have a job when it’s over and they will receive home loan relief. For renters that will be a tougher and they will need help.

What China showed was that if you enforce the shutdown – and we can do it, with huge penalties for those who leave home without permission – the pain is short and sharp. China is now returning to work.

Measures that try to spread the impact over six months are extremely dangerous for the fabric of the society.

To illustrate, Tasmania now has a different strategy that should work: isolate yourself from the rest of the nation. Northern Territory is following an isolation path and WA, ACT and South Australia are looking at a similar strategy.

And so, we maybe be looking at a Queensland, NSW and Victorian disaster with South Australia and ACT too close for comfort. .

Of the three eastern state leaders Victoria’s Daniel Andrews has come closest to understanding the problem.