Currently, the world is experiencing a Black Swan event. Characterised by their extreme rarity, their severe impact, and the widespread insistence by some that they were obvious in hindsight, Black Swans appear to have one increasingly predictable characteristic: they have multinational if not global impact.
We know that Australia has so far coped well with the coronavirus Black Swan, thanks to a large dose of good management and a dash of good luck. The level of legislative change, formation of new government policy and mobilisation of the bank and non-bank sectors has been truly remarkable and extremely well-targeted. Without the government and finance industry support, many companies would have had no option other than to file for voluntary administration.
At Banjo, in the space of a little over 8 weeks we have encountered heartbreaking stories of clients experiencing decreases of 50-100% in revenue and suffering emotional and financial distress.
At the same time, not one of these clients has been paralysed by fear or stuck their head in the sand. Small business owners in general are resilient and care about their staff. Pretty much every client we have spoken to cannot wait to relaunch their businesses when Stage 3 restrictions are lifted, and many are using this time to explore a number of business options.
First among these is the business strategy. We advise our clients to go over their business plans to find ways to: either refine and focus the current offering, or pivot into new business opportunities; negotiate supplier terms on a case by case basis; improve debtor collection; run down existing inventory levels; reduce expenses; launch online portals to generate sales; negotiate rent relief with landlords and close stores; and in general get “lean and mean”.
As restrictions begin to ease, we’ll hopefully move from a black swan event to a phoenix event, as businesses rise with renewed vigour to thrive through another cycle. SMEs across Australia will be seeking the funding needed to rebuild inventory levels, hire staff, and spend on new equipment and marketing campaigns to rebuild their revenues back up to historical levels.
Finally, we’ve heard often in recent times to “never waste a crisis”. As a lender, we believe that means encouraging clients, even in the good times, to always be preparing for the unknowable, and thinking about modes of recovery.
Following the PM’s announcement on Friday of a 3-step plan to lift the country out of Coronavirus shutdown, Australia, in common with a few other countries around the world, will now prepare to ease some restrictions. Different states will proceed with the measures at their own pace. For instance, in NSW as of Friday 15 May, cafes, restaurants, outdoor sport, weddings, house auctions and some other functions can accept up to 10 people at a time.
This is great news for many SMEs, who can start planning to emerge from “hibernation”. But it’s not quite going to be business as usual. What kind of adaptations will we have to make for the new work and business environment, at least for the short to medium term?
The details of mandated workplace requirements will become clearer over the coming weeks. It could involve anything from
As SMEs adjust to the new environment, or pivot to cater for altered customer demand, they will have to review their strategy. Additional working capital to re-boot their business is going to be top of mind.
Strategic activity to be funded could include: rebuilding inventory levels; hiring new staff or re hiring valued ones; increasing marketing initiatives; temporarily adapting business premises for social distancing; and covering the cashflow gap to allow for slow debtor collection.
At Banjo we expect to see strong demand for loan funding beginning later this month, through to September/October 2020.
The borrowing capacity of many businesses may be reduced due to: their existing debt levels; other loans taken out; lack of revenue; or non-payment by their customers. Typically, clients will seek to combine the refinancing of existing debt with working capital recovery funding into one loan.
Banjo will be on the frontline of helping businesses start to build their recovery. However, a few factors mean that it will be more difficult for lenders to assess clients’ ability to pay loans. Approvals may take a little longer than usual. Banjo will work with clients and their advisors to ensure we fully understand a client’s circumstances and lend responsibly.
We are currently seeing two potentially good lead indicators of recovery, with the ASX currently at its highest level since March, and consumer spending now on the rise.
According to credit bureau illion (in partnership with AlphaBeta) consumer spending has risen back up to just 4% below pre-pandemic levels, off the back of the JobSeeker payments flowing through, and the announcements of the partial lifting of restrictions in most states.
Talk of the recovery invokes an alphabet soup of predictions, from V-shaped, to U or W-shaped. There are many unpredictable factors still in play, so no-one truly knows for sure. However, with a range of potential scenarios it’s fair to assume that not all the surprises will be negative ones.
Yes, poor economic data will be in headlines for a while, but it will lag the actual health and economic recovery. We have to factor in current geopolitical tensions with potential for trade wars and further interruptions to the supply chain. We have no idea when international tourism will return, nor as yet the impact on property prices.
Yet the reopening of our economy is happening sooner, and so far more safely than other parts of the first world economy in Europe and America.
The forced withdrawal of most people from their usual habits could result in permanent changes in behaviour or choices. But the potential shifts in consumer demand are just as likely to have an upside than a negative outcome. Anything from greater demand for home office products or health supplements, or from urban living to tree change, is possible. Domestic tourism and home delivery services are certainly set for an upsurge. Provided businesses are nimble and responsive, there will be markets to supply.
And of course technology and innovation will be extremely important weapons to have in your armoury in the recovery period.
As one leading bank economist said recently said, it is not how far the tide goes out in this contraction that is important, but how long it stays out for. There are hopeful signs that it is heading back in to shore, so hunt out your bathers and prepare to jump in.
At an economic and market update webinar held recently for Banjo Loans clients, David Robertson, Head of Economic and Market Research at Bendigo and Adelaide Bank, said that due to the coronavirus, 2020 could be described as an ‘economic gap year’.
In other words when it’s over, business will resume, and will have a somewhat changed outlook from the experience.
Overall, Robertson took a fairly upbeat view of our economic future relative to the current situation. Here are some of his observations and predictions.
Australia has benefitted from good management and good luck, in that distancing and shutdown measures were applied early and proactively, and so far have flattened our infection curve. Fiscal stimulus measures have been timely, and very effective so far.
There is expected to be a short-term impact on residential property prices, with a 5-10% reduction in prices coming through quickly. Clearance rates will probably remain low for the next 3-6 months. The government business stimulus package together with bank repayment pauses, should mean that forced home selling will be kept to a minimum. Robertson’s personal view is that this is a market to buy into.
Australian stock markets have to date been more volatile during COVID-19 than they were during the GFC, with a 39% decline in just under 4 weeks. As always, super and stock market investors would be well advised to take a long term view. Robertson believes that taking up the option introduced by the government to allow the withdrawal of $10,000 out of superannuation is unwise and should only be a last resort.
Not surprisingly, consumer and business confidence has fallen. Roy Morgan reports that consumer confidence is lower than during the GFC but not as low as the 1991 recession yet.
The Reserve Bank of Australia is predicting up to 10% unemployment. We have seen a 6.7% fall in wages since the shutdown began. Victoria, Tasmanaia, WA and the Northern Territory have been impacted the most, with NSW and Queensland being more buoyant.
Among the hardest hit sectors are: hospitality; arts and recreation; tourism and other service sectors. Seventy per cent of Australia’s GDP comes from services, tourism and education.
The sectors least impacted have been: education and training; utilities; health care; transport and logistics.
Retail has experienced its best ever March and April trading. No prizes for guessing that this is largely due to panic hoarding of supermarket goods.
The world’s largest economy, the USA, is arguably suffering the most with huge numbers of unemployed and the highest mortality rate.
China is getting back to business quicker than expected, despite the huge hit to their economy. As it is currently Australia’s largest trading partner, this is good news.
The iron ore price is holding up well, at more than US$80 per tonne, due to demand from China and SE Asia. The coal price is also holding up pretty well, the gold price is high, and agriculture prices are steady, all of which helps.
However, as we know from the bowser, the price of oil has collapsed. Australia is a net energy exporter, so the plunge in the oil price will flow through to a fall in LNG prices.
Robertson believes that now is a great opportunity to be locking in debt. The RBA has cut the rate to an historic low, and has now pulled the quantitative easing lever. The 3 year bond rate is down to 0.25%, a record low, and the 10 year rate for government borrowing is 1%.
The banks have access to cheap money and that is flowing through. Lenders and borrowers all have a part to play in getting liquidity into the market. Regulators recognise that.
Robertson believes structural reform is needed to drive sustainable growth beyond the crisis. In recent years there has been a focus on getting the Federal Budget back to surplus. Now we’re in deficit, the surplus is off the table, so why not spend on structural reform. In his view, the nation can afford more debt, and will see a return for that investment.
He argues that while Australia does need to be more self-reliant in manufacturing, it would be naïve to think we can compete for all types of manufacturing. He believes we should not indulge in protectionism.
There is an argument for tax cuts for small business. An increase in GST would be the fairest way to offset and make way for income tax cuts.
This has been the pattern for the last 100 years, so take heart.
Robertson’s informed view is that right now we have hit our lowest point in inflation. Given the last two years of record low interest rates combined with coronavirus stimulus measures, inflation will start to build on the other side of this crisis, as early as 2021. There is growth ahead!
The Aussie dollar remains low, currently at around 62 or 63 cents, which is a big help to the economy, contrary to popular belief. Depreciation tends to flow through to higher rates of growth, and better outcomes for jobs and inflation.
Over the next two years Robertson believes we will see our highest unemployment rate since the 1930's, but ultimately a big V or W in growth of both the Aussie dollar and employment.
Once we get past COVID-19 we will be back to old issues around wages growth, technology wars and climate change.
Finally, Robertson’s key message for small business is: just as your financial strategy and balance sheet structure are important, so too is your strategy in the context of changing consumer demand.
Have you considered what post-COVID-19 spending habits and consumer choices will look like? Make sure you adapt your business strategy to deal with digital disruption and compete with virtual commerce.
A recording of the webinar is available at Banjo’s website for you to view anytime.
Disclaimer: The information contained in the article is the views of Bendigo & Adelaide Bank’s Head of Economic & Market Research, David Robertson and not that of Banjo Loans.
Late last week the Prime Minister announced at a press conference that the measures Australia has taken so far appear to have been pretty successful at preventing the coronavirus from spreading too far through the community.
This means there is a real possibility that restrictions on work and society could start to be lifted in stages, beginning in approximately four weeks, so long as necessary health safeguards were all in place.
The health safeguards were: a more extensive virus testing regime so asymptomatic people could be tested; a robust-enough health system to ensure any outbreak could be managed; and the ability to lift contact tracing to "an industrial capability".
This last item refers to the controversial app developed in Singapore. There are privacy concerns around its use, which is expected to be voluntary. These concerns now need to be weighed against what is right for the health & economic future of all Australian’s.
These are the most encouraging signs yet that, provided the trajectory of infections remains under control, we are entering an environment where business can start to think about what recovery will look like. This is cause for confidence, which should have a slow flow-on effect to the rest of the economy.
The government also sent a signal that businesses won’t have to go it alone, acknowledging that growing the economy under the old settings is no longer an option.
Following discussions with the RBA governor and other leading economic advisers, the Prime Minister said, "We are going to have to have economic policy measures that are going to have to be very pro-growth, that are going to enable businesses to employ people, that will enable businesses to invest and businesses to move forward."
As an SME owner, you can keep one eye on government announcements of measures to support the above statement, while also contemplating how best to position yourself for an uplift in activity and positive sentiment.
While we are still in uncharted territory and none of us has a crystal ball, there are some potential scenarios you might want to consider:
Scenario 1: Pent-up demand.
Once relaxation measures begin to come in, there could be a surge in demand as your market relishes the relative freedoms and wants to make up for lost consumption.
This scenario is an argument for not cutting back too far today, to ensure you are well positioned to capitalise on the post-crisis recovery.
Scenario 2: Pivoting your business to respond to different needs.
Like the boutique distillers who have switched production to making hand sanitiser, are there current or potential post-pandemic market demands that you could position your business to respond to? Can this be done by adapting existing resources and with minimal staff retraining? Do you need to begin exploring other supply chain options, or alternative sales channels?
Scenario 3: Put a long term strategy in place
If you’re a B2B, and your clients are “in hibernation”, consider doing some long-term strategic planning.
Devote some energy to re-evaluating your operations, platforms and processes, or researching alternatives. Take the time to quietly and prudently nurture contacts and leads, letting them know you stand ready to work together again, and in the meantime are using the time wisely by positively planning for contingencies and future developments.
At Banjo, while we are helping some of our clients work through immediate problems they’re experiencing today, we’re also working with others on their post-pandemic recovery planning.
That can range from the provision of working capital to help fund the reinvigoration of their business, or helping with a short-term cash boost when the usual cycle of fund flow has ceased.
We can all take heart that the signs are the economy will be given support and, importantly, freedom to revive and grow on the other side of this.
NEWS JUST IN:
The conditions of the JobKeeper wage subsidy were updated on 11 April, including those relating to casual employees.
Many small business owners are throwing all their energies into keeping their businesses going during this crisis, as well as adapting to new realities like remote work, social distancing and wildly fluctuating supply chains. In a world we barely recognise, the potential for stress, confusion or exhaustion is high.
It’s been said that when the pandemic eventually dissipates, a “secondary mental health crisis” could emerge, as the full effects of the economic and societal fallout take hold. To give yourself the best chance of inoculating your business against those secondary effects, follow these steps to manage your team effectively and maintain your own energy and good spirits.
You may feel like you need to work twice as hard just now. However, in the words of legendary business guru Stephen Covey, make sure you “sharpen the saw”. Instead of working flat out till the saw – you - gets ever blunter and less effective, put some measures in place now to maintain your health and wellbeing. Encourage your staff to do the same.
Mental health is equally as important as physical health during this time. Pre-existing mental health issues can become exacerbated while people are socially isolated and facing uncertainty. And faced with an unprecedented crisis, people who are otherwise mentally healthy can find themselves becoming anxious – about the security of their business or job; about their risk of catching the disease; or about the future more generally.
Keep your physical and psychological immunity at optimum levels by:
Sometimes the pressure can just be too much. If this is affecting you or your staff, there are fortunately plenty of resources you can access, at little or no cost.
Mental health organisation Heads Up have produced a great guide ‘Actions for small business owners to improve their mental health and wellbeing’, which you can find here:
https://www.headsup.org.au/docs/default-source/resources/454574_0119_bl1909_acc.pdf
If any of your staff are struggling with mental health issues, Beyond Blue has lots of resources and a helpline available:
https://coronavirus.beyondblue.org.au/i-need-support-now.html
Communicate and Stay on Message
Clear, consistent communication is always important, but now is vital to promote confidence and reassurance to staff. They, in turn, will help promote that sense of confidence to your customers or stakeholders:
Stay Connected
Watercooler or lunch room chats are not possible just now, so it’s important to stay in touch with your team. It could be a check-in every day, a couple of times a week, or whatever frequency suits your and their needs, via email, phone, or video-conferencing.
To help to keep everyone focused, happy and productive:
NEWS JUST IN:
The government announced over the weekend that it will extend the JobKeeper wage subsidy to casual employees who have worked for multiple employers in the past year. The details are still being worked out, and will likely be announced later this week
There are encouraging signs that the virus’ curve may be starting to flatten, but it is too early to call just yet. As of 7 April 2020, 5844 Australians were infected. Wage subsidies and commercial rent relief were among the pieces of good news for SMEs in recent days, as part of the federal government’s rollout of measures to keep Australian businesses afloat in the choppy sea of the coronavirus pandemic.
Here is a roundup of two of the business relief measures announced in the last 7 days. As with many of the benefits being made available to SMEs, it is vital that you proactively check whether you are eligible and if so, register or apply to the relevant authority.
To benefit from these conditions landlords and tenants will need to sign up to the code of conduct. For landlords and tenants that do so, State and Territories have agreed to look at providing the equivalent of at least a three month land tax waiver and three month land tax deferral on application for eligible landowners. Landlords must pass on the benefits of such moves to the tenants. Mediation will be available through existing State and Territory mechanisms.
A further announcement on the development of this code of conduct will be made following the National Cabinet meeting on Tuesday 7 April.
Action you should take: If you are a tenant and in financial distress, seek a time with your landlord to discuss the options available, and the joint signing of the code of conduct for your mutual protection.
The Coronavirus (COVID-19) epidemic is taking its toll on Australian consumers and businesses. As of 30 March 2020, 4163 Australians were infected. The government has started offering relief to Australian businesses in need. The total economic relief package is worth $189 billion. Nearly half of that comes in the form of allowances by the Australian Tax Office (ATO). The ATO is taking unprecedented steps to minimise hardship for small businesses, but you need to take initiative to get the relief. The tax authority is spending $90 billion to help businesses survive the crisis.
You should familiarise yourself with the tax relief options available. Here are some provisions that could help your business.
At Banjo, we want our clients to grow, prosper and achieve their goals. From time to time, we all face challenges and we need to do our best to protect our livelihoods. Recent unforeseen events – floods, bushfires and now COVID-19 – have triggered us to prepare the following to help you:
1. Understand your cash position
