The forced closure of restaurants, cafes and other hospitality venues will have wide, and damaging effects on the sector. There are some important factors to focus on during this time of disruption.
With the announcement from Prime Minister Scott Morrison that all pubs and clubs must effectively close their doors at midday yesterday, and restaurants and cafes cannot provide table service in venue, the hospitality sector is in uncharted waters. It is currently not known when venues will be permitted to re-open or recommence normal business activities, so the need to act quickly and decisively is imperative to ensure businesses are preserved when facing an extended period of little or no cash flow.
The global coronavirus pandemic has had its first concrete impact on the hospitality sector of Australia. As the entire industry moves into the unknown, facing significant financial and operating pressures, business operators need to be proactive now, to minimise both current and lasting damage to their businesses.
We believe all hospitality businesses should be looking to focus on a number of things concurrently:
Key benefits of the package
- The RBA backed a term funding facility for banks to support lower cost lending to small and medium businesses.
- Deferrals of loan repayments of principal and interest for up to 6 months for small businesses, including equipment finance leases and business credit cards.
- Fast tracked approval processes to enable small business to get access to these relief packages as soon as possible.
- $100 billion in loans eligible for the package.
- These measures are forecast to leave up to $10 billion in the hands of small businesses to help them stay in business.
Managing cash flow
Hospitality operators now face the reality of generating little or no operating cash flows for an unknown length of time. As a result, cash flow management and ongoing flexible financial modelling over the coming months will be critical in determining break points and when key decisions must be made. To do so, operators are urged to reassess their cash flow immediately, and stress-test what that will look like over the coming months, and then have plans in play at various intervals to keep their business afloat.
Maximising cash flows with aggressive cost reduction in particular workforce management (refer below), extending supplier terms, management of tax liabilities, extending financing facilities and accessing government grants and stimulus should be the immediate focus. All operators should concentrate on ensuring that there will be a viable business when the crisis recedes, and also a workforce that will be available to assist when demand resumes. Sensible working capital management is crucial for ensuring that can be achieved.
We believe that there will be a significant uplift in demand once this passes. Therefore it’s imperative that businesses should not lose all their staff and supplier relationships. You’ve got to balance essential right sizing measures so you have the right systems, relationships and people to support the rebound.
Labour is a significant cost to all hospitality businesses so management for today, with a view to tomorrow, is critical to riding through this period of extreme operating pressure. Actions required immediately include:
- Employees who need to stay at venue/on-premise – consider what essential staff are required to continue to attend your venue during shutdown. Consider whether any special measures should be in place to protect these employees from any risks, for example security and OHS.
- Employees who can work from home/remotely – consideration of those employees that can legitimately work from home/remotely.
- Right-size your workforce – in the absence of a ‘stand down’ period contained in an enterprise agreement or contract of employment, pursuant to section 524 of the Fair Work Act, employees that cannot be ‘usefully employed’ may be able to be stood down without pay because of a stoppage of work for which the employer cannot reasonably be held responsible. Getting advice around your legal obligations at this time is critical to effective management of your workforce and resultant labour costs.
On the flipside a number of our clients have reached out seeking urgent access to casual staff due to unprecedented demand, which is expected to continue as this unusual situation unfolds.
Anyone who may be contemplating workforce restructuring should consider their networks and see if we here at KPMG Australia or others they know, can connect them with other organisations who are looking for a temporary large increase in their casual workforce, with a view to having these remain available to return to when the situation normalises.
Reimagine your offering
The advent of these forced closures delivers permission to be different and deliver on ideas and concepts of innovation in your delivery to consumers. While restaurants and cafés can continue to operate on a take away basis, this doesn’t have to only apply to the cafe or local fish and chip shop. Restaurant chains or brands more associated with in-venue dining experiences now have an opportunity to market and brand themselves to offer a take away or out-of-venue offering.
Similarly, hospitality venues may be able to use their workforce in alternative ways, just as manufacturers have turned from manufacturing cars to ventilators. Staff may now be able to be redirected to working on marketing initiatives, participating in repair and maintenance activities or supporting community or charitable activities on behalf of your brand.
The ‘working from home’ market has just boomed like never before, so hospitality businesses should be asking themselves if there is an opportunity to partner with the corporate sector in providing a solution to sustain this new norm and reducing reliance on their workforce using a limited store of consumables from Coles, Aldi or Woolworths.
Frank and honest discussions with all stakeholders from the outset are going to be critical in navigating the way through this crisis — particularly with staff, financiers, landlords and suppliers.
Being open with staff about the shutdown and the impact on staffing requirements is critical. Remaining human during this process and keeping an open dialogue now and during any stand down will be critical to assisting staff through what will be an incredible stressful period personally.
Be clear and regular with communications with staff during the stand down period and advise when and how they will receive communications to remove any uncertainty.
Consider implementing or confirm availability of an Employee Assistance Program available for any staff who feel they could benefit from confidential and free counselling at this time.
It will be critical to engage your financiers as soon as possible. Start discussing with them now what support you might need – alongside cash flow modelling performed.
Take time to reconfirm your understanding of your current loans, including bank covenants and repayment obligations and seek payment holidays or extension of terms or breach of covenant waivers proactively.
Landlords and suppliers
Having honest discussions with landlords and suppliers about what this scenario might look like for your business will also help you potentially negotiate things like rent holidays or reductions, or delayed payment instalments for accounts that are stretched thin. Having a clear picture of what your cash future looks like will allow you to approach these discussions factually and hopefully remove the need to come back to the table to renegotiate. Developing a shared sense of the future you and your landlord and/or key suppliers want to enjoy when business operations return to normal will be important to this dialogue.
Accessing existing government responses
Businesses should start looking at the various ways they can gain assistance from both federal and state governments through the various tax assistance and stimulus packages announced.
A summary of key initiatives can be found in our guide:
While accessing these initiatives is highly advised, for businesses in the hospitality sector these measures are in no way sufficient to mitigate the loss of trade. As a result, hospitality operators must take matters into their own hands while managing through these extremely difficult times. Any further information regarding direct government support or funding to the hospitality sector is still in negotiation and not known if, when or what will be available at time of writing.
Safe harbour and insolvency
The Safe Harbour regime has been of particular interest for many in the hospitality sector even prior to the mandatory closures. These measures appear to have now been put aside with the Australian Government making sweeping changes to the personal and corporate insolvency regime as a result of the coronavirus pandemic.
The key elements of the package are:
- A temporary increase in the threshold at which creditors can issue a statutory demand on a company and the time companies have to respond to statutory demands they receive.
- A temporary increase in the threshold for a creditor to initiate bankruptcy proceedings, an increase in the time period for debtors to respond to a bankruptcy notice, and extending the period of protection a debtor receives after making a declaration of intention to present a debtor’s petition.
- Temporary relief for directors from any personal liability for trading while insolvent.
- Providing temporary flexibility in the Corporations Act 2001 to provide targeted relief for companies from provisions of the Act to deal with unforeseen events that arise as a result of the coronavirus pandemic.
More information can be found in the Australian Government's Treasury factsheet: Providing temporary relief for financially distressed businesses (PDF 197KB)
While these changes are welcome, having a clear course of action and workout is reasonably likely to lead to a better outcome for a company than immediate appointment of a liquidator or administrator. As a result, directors should continue to ensure they have taken appropriate steps to ensure their company for:
- paid employee entitlements up to date
- kept appropriate financial records
- kept and maintained tax reporting obligations.
For operators who think their businesses are at risk of insolvency, it is important to seek professional and legal advice immediately.
While the decision to relax the laws of insolvent trading for 6 months from government are welcome, directors still need to be aware that their fiduciary and other statutory obligations remain in place (directors duties etc.) and therefore they should take caution as to how they continue to trade through these difficult times and take advice from professionals.
An incredibly resilient sector
While the hospitality sector is undoubtedly going to be dealt a severe blow across 2020, the industry has and will bounce back if it moves swiftly and utilises the support currently available. The sector has proven to be amazingly resilient after bouncing back from the lock out laws, smoking bans and the GFC in past years. It’s difficult to predict what the sector is going to look like on the other side of this crisis, but those operators who take control of their situation and seek support will have the best chances of surviving.
Information accurate at the date and time published.
If you have any questions regarding the content of this article and would like speak to someone from our team please contact us.