The novel coronavirus was first discovered in China on 31 December 2019. The virus has been traced to a seafood and poultry market in Wuhan. Initially it was hoped the virus could not be passed from one person to another. Eventually it was discovered that the virus was highly contagious and has a fatality rate above that of the seasonal flu but significantly lower than previous outbreaks including SARS and Ebola.
So far, the only countries that have seemed to take control of the situation are Singapore, Hong Kong and Taiwan. This was achieved by “going hard and going early”. To date our response seems to be more reactive then proactive, but with the unprecedented situation and the ramification across all aspects of life only time will tell how well the situation was handled.
The next week will be critical in confirming if we are on track to follow the same aggressive growth in infections as has been experienced in Europe (Italy) or if we can manage the situation in a similar manner as Singapore has achieved. With mass gatherings cancelled but schools remaining open our response seems somewhere in the middle compared to other major countries.
Impact and forecast impact:
- GDP is forecast to fall to 1.5% for 2019/2020
- Cash rate is expected to fall to 0.25%
- Share Market (XAO All Ordinaries) have fallen by 30%
- Consumer sentiment index is currently at 95 (Index was at 88 during the GFC)
- Tourism, Education and Agricultural industries have been hit the hardest
The impact from COVID-19 has been clear and obvious across our client base. Examples we have seen have included:
Hospitality (Cafes & Restaurants)
Sales have dropped by 20% - 30% as consumer fear has driven them away. Staffing will need to be cut, and menus reduced to allow operators to survive until the COVID-19 peak has passed.
Exporters / Importers (Including Online Retailers)
China accounts for 1/3 of all Australian exports, as such the impact has been significant. Further movement of supplies and goods has been impacted with all vessels being quarantined off the coast before docking can take place. Online retailers are finding only a moderate drop in demand, however maintaining timely supplies is becoming a significant challenge.
With China going back to work this week, the supply issues should improve in the coming weeks.
Retailers were finding the conditions difficult prior to COVID-19, with the Australian Bushfires being the most recent challenge. Large retailers including Kikki K, Jeans West, Collette, Bardot, Top Shop, Gap, Esprit, Roger David and Shoes of Prey to name a few, have been the most recent casualties of the downturn of the retail industry. The ban of Chinese travellers is having a significant impact on retailers located in key shopping locations.
Unless landlords work with the retailers or the Government provides additional support, then we would expect many more retailers to close before the end of the year.
Hair & Beauty
Operators of hair and beauty spas and stores are finding it difficult with both staff and clients concerned of the risks of catching COVID-19.
So what does this mean for your small business?
The impact is real but the severity and importantly the length of the impact is unknown. China took approximately 70 days from identifying the problem to passing peak infection, with the country now returning to work.
We can hope that the data gathered through the 170,000 cases to date provides a better understanding of how to test, treat and eventually vaccinate or cure the infection. Either way, it is reasonable to expect that within 2 months Australia will be coming out the other side of this Pandemic.
From a strictly business perspective, our recommendation is to remove yourself away from everything for a day, and do a thorough cashflow forecast based on your trading being best case, expected and worst case. Under each scenario analyse how far your current working capital can be stretched.
Once you know your likely forecast positions we recommend:
- Cut back on non-essential expenditure
- Implement a 2 month freeze on recruitment
- Contact your landlord and proactively negotiate assistance in the short term
- Contact your suppliers and check in on options with payment terms
- Consider the policies and systems available to allow employees to work from home
- Offer attractive early payment incentives to keep your debtors position healthy
- Look at innovative options to improve your labour model while keeping your doors open (From redesigning key processes to offering staff leave at a reduced pay)
- Plan ahead for the worse-case scenario so you are prepared in the unlikely event it eventuates
- Investigate Federal and Government support that may be available.
Federal Government - Virus Stimulus Package
Last week the Government announced a stimulus package aimed to support small business through the economic impact of COVID-19.
Our view is that the stimulus package, while being a significant investment could have been better directed. SMEs operating as Sole Trader or under a Trust structure have been largely ignored under the current stimulus package. However, it is believed a second package will be announced later this week.
Current stimulus package highlights:
- Increasing Instant Asset Write – Off
- The $30,000 instant asset write off has been increased to $150,000 and businesses with turnover up to $500m are now eligible
- Cash Flow Assistance for business
- Up to $25,000 will be paid to small and medium sized business employing workers. The payment will be made in the form of a credit on an upcoming business activity statement.
- Up to 50% of an apprentices or trainees wage for 9 months may be covered for eligible businesses.
- Other benefits are directed directly to individuals. We will wait and see what the next round of stimulus involves.
Our take is that most SMEs are not after charity but simply an opportunity to continue trading through these difficult times. This is compounded with the banks risk appetite following the banking royal commission. Ultimately we would like to see the Government set a fund aside to allow for direct lending to SMEs under a considered and structured approach.