Maintaining competitive advantage for hospitality operators during the COVID-19 crisis

The hospitality sector is experiencing significant impacts from COVID-19, including material changes to operations from Government regulations, which can lead to financial hardship.  It is a stressful time for business owners and operators.  While a level of social distancing measures may be relaxed in the short term, some businesses may find it difficult to recommence normal business operations.  Consideration of the current state of your business, combined with an eye to the future can preserve your position and may create a competitive advantage when operations return to normal.

The immediate steps operators will likely have taken to protect and preserve their business during the shutdown include the following:

  1. Adapt to the changing business landscape – where possible, continue takeaway or delivery options to comply with Government regulations.  This may include new or changed delivery and pick up options, new product offerings and creative ways to stay connected to customers.
  2. Access all available support and funding packages – This includes the Government’s JobKeeper program, deferred remittance of PAYG, rates and land tax and obtaining up to $250,000 business loans from existing financiers.
  3. Reduce costs as far as possible, including any available payment relief – This includes consideration of all options to preserve cash by reducing costs (payroll, utilities, insurances while not operating and other operating costs) as well as waiver or deferral of rent and loan repayments.
  4. Assess the current financial position of the business – This includes a snapshot of all available funds and the position of trade debtors, trade creditors, employee liabilities, statutory liabilities (including taxes, property holding costs and superannuation) and external debt.
  5. Create a cash flow forecast that bridges from now until the likely end of the shut down and then forecasts the working capital requirements to re-commence trading.  The forecast should include all available payment relief and deferrals, new funding, government grants and any payments required to be maintained.  In short, this should be the bridge from now until the likely end of the shutdown and will assist to show what the balance sheet might look like at that time.

Business operators should now start considering the landscape “on the other side”, after the current “hibernation period”.  Bear in mind that reduced consumer discretionary spending is likely, which will lead to reduced operating revenue, at the same as deferred payments are required to “unwind”, which will increase cash outflows to meet the deferred tax, rent and other costs.  The debt that builds up during the current hibernation period will need to be serviced once business can recommence and also working capital will be required to restock premises.  The balance sheet position when the business re-opens may be more strained than at the start of the shutdown.

It will be critical that the financial discipline developed during the shutdown continues on the other side.  It is also possible that the calls on cash flow may exceed the ability of the business to meet those calls.  In that circumstance, it is appropriate for operators to turn their minds now to the available restructuring options and solutions, including those from insolvency processes, which provide an opportunity to reorganise and deal with those debts.

We are likely to be at the high point of the market’s “sympathy curve” right now and those operators who get ahead of the market with proper restructuring may generate for themselves a competitive advantage once business can resume.  Specialist advisers should be called upon to assist business owners to navigate these considerations and the timing is right to have those conversations ahead of business recommencing.

AUTHORED BY

Emma Fletcher

Emma Fletcher
Senior Manager, Brisbane
T: +61 7 3333 9879
E: efletcher