Thought leadership

The coronavirus cashflow crisis facing Kiwi businesses

Dan Lowe Dan Lowe

Here in New Zealand, we still only have a few known cases of coronavirus, which is encouraging. However, the economic symptoms of COVID-19 are likely to be extremely widespread – and they may be just as tough to recover from. This outbreak has highlighted just how dependent our economy is on the rest of the world, both in terms of our export market and how much of our product is sourced from and manufactured offshore.

There has been a noticeable increase in anxiety levels throughout the business community in recent weeks. For businesses which run on tight margins, especially in the worst-affected industries, this is going to be an extremely challenging year. There is a sense of imminent complications for all businesses: large and small, international or domestic.

Being squeezed in three directions

Cashflow is the lifeblood of every business, but keeping it flowing could become a lot tougher in the months ahead. As the economy slows down, businesses are likely to have pressure applied in three key areas:

  1. Buying supplies is soaking up cash. Businesses are concerned they will run out of essential products, so they’ve been buying-up large at full price or even at inflated prices. Some exporters sent goods overseas weeks ago, but the products haven’t yet ‘landed’ or been cleared due to various restrictions and quarantines happening in those countries. Stock levels are also becoming dangerously low as factories are shutdown or operating at a reduced capacity. They are looking for alternative suppliers, but this takes time and normally an increased cost. Often payment is required up front with these new relationships as well. The impact on their working capital is considerable.
  1. Sales are down. Hospitality clients have been the worst affected so far, but this will ripple outward across almost every sector of the economy. Less cash coming in means it’s tougher to pay staff and suppliers.
  1. Clients will be slower to pay. This can become a chain reaction: your clients are late paying you, so you don’t have the money to pay your suppliers on time, and so on. It is incredibly important to stay on top of your work in progress and debtor situation.

All this is happening at the worst time of year for many businesses – coming off the holiday period with reduced trading days and right before the year’s biggest tax burden is due.

What help is available?

Talk to your bank

The Reserve Bank has implemented a regulatory initiative to defer new bank capital rules by a year. This will reduce the burden on financial institutions at this time of uncertainty, but also give banks the headroom to lend around $47 billion more than expected during a global incident like this.

The banks themselves are saying they will look for ways to support cash-strapped businesses, including temporary interest-only repayments, restructuring or increasing business loans and loan consolidation. It is important that these are options are explored sooner rather than later to increase the cash “headroom” for your business. 

Government support

The Government’s $12.1b stimulus package for New Zealand businesses is significant; it’s worth 4% of GDP, and is bigger than the packages provided in Australia and the UK on a per capita basis.

As anticipated, to reduce the impact of COVID-19 on the economy, the package includes wage subsidies and a cash injection for the health sector; here are the key points businesses needs to be aware of:

Wage subsidies: a $5.1b wage subsidy scheme has been put in place, which pays a lump sum of up to $150,000 to employers - $350 per week per part time worker, and $585.80 per week per full time worker from today. To qualify for this subsidy, your business will need to declare a loss of at least 30% in revenue compared to last year for any month between January 2020 and the end of the scheme in June 2020, and you will need to take active steps to mitigate the financial impact of COVID-19 on your business by demonstrating that you have spoken to your bank about your situation. Businesses can apply for this funding now and receive the cash within five days’ time.

Employee self-isolation incentive: to stem the spread of COVID-19 by encouraging workers to self-isolate, $126.5m has been allocated to cover 14-day isolation periods, or an employee’s entire period of sickness. This covers employees, contractors, and the self-employed. The sum allocated for each individual is also $350 per week per part time worker, and $585.80 per full time worker. Employers are still required to meet their current sick leave obligations to employees over and above this incentive.

Tax changes and options

Upcoming provisional income tax to pay? Inland Revenue is offering tax relief and income assistance to those affected by the coronavirus downturn, including re-estimating your provisional tax, early refunds and payment in instalments. You may also be able to get an extension to your filing date for income tax returns, and penalties on late filings for PAYE and GST may be remitted.

There’s also a significant change for smaller taxpayers (residual income tax under $5,000) that would have otherwise been paying provisional tax in the 2020-21 tax year; they will benefit from immediate cashflow as they can now defer the payment of their tax to 7 February 2022. The estimated total of this cashflow is $350 million in the 2020/21 fiscal year.

Outlasting the outbreak

Our Government is well-positioned to support the economy, with surpluses and more ability to borrow than many of our trading partners. The spending will probably start with infrastructure, which generates jobs and improves our quality of life in the long run.

As unexpected as COVID-19 has been, downturns are an inevitable feature of the economic cycle – and we will get through it. This outbreak will eventually come to an end. And if your business outlasts the virus, you should be stronger for the experience.