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Calculating your exposure and forecasting cash flow in difficult times

- May 6, 2020 2 MIN READ
cash flow

With each passing day, companies are experiencing changing circumstances which can exacerbate feelings of uncertainty about the future of their business. It is essential to do some calculations to see if you can sustain a period with diminished revenue (and if so for how long), writes Domenic Calabretta CEO of Mackay Goodwin.

Your accountant will be able to provide a much more thorough exposure calculation, but you can do some “back of envelope” sums using the following formula:
Total Current Liabilities +Break Costs + Critical Holding Costs = Your Exposure.

Total Current Liabilities are your creditors who are due for payment now. As I mentioned in my first article, they are now restricted in any recovery proceedings for six months (unless they had already started proceedings before the changes to insolvency legislation were introduced.) They are now also temporarily unable to initiate any action for sums below $20,000.

Break Costs are the amounts (or penalties) you need to pay for breaking an agreement. They might include redundancy and employee entitlements you need to pay when you stand down workers. You may need to pay a penalty to a supplier or customer if you fail to meet minimum purchasing requirements or deliver minimum required levels of goods or services. Defaults on lease or mortgage payments, loans or overdrafts may also incur penalties.

Critical Holding Costs is the money you need to keep your business afloat. The difficulty is that none of us knows how long that may be. I am advising clients to consider six to 12 months. Critical Holding Costs might include:

  • wages (you may be entitled to Jobkeeper to help with that);
  • insurances (including workers’ compensation);
  • property and equipment leases;
  • utilities like phone and power;
  • loans and other banking facilities payments and cost of licences, trademarks, systems and so forth.

Once you have worked out your holding costs, you should be able to work out a cash flow forecast for the next 12 months and understand how able your business will be at managing your financial commitments. Can your assets and capital cover your exposure, and if not, what options are available to you?

There are several different options and strategies you can pursue to free up some capital to meet commitments or provide some relief.

  1. Government funding and relief
  2. ATO support
  3. Reviewing your insurance policies
  4. Reducing overheads
  5. Financing assets
  6. Equity Capital Raising
  7. Informal Creditor arrangements
  8. Safe Harbour
  9. Pre-pack Sale
  10. Voluntary Administration and Holding DOCA
  11. Liquidation

There is much you can do before considering something as drastic as liquidation, so it pays to speak to your accountant or financial adviser sooner rather than later to get yourself on the path to recovery before it is too late.

Mackay Goodwin is offering several free advisory activities for businesses who find themselves in trouble. Aside from free webinars, it has also released a downloadable business survival pack. It is also providing an initial free consultation with businesses,  and to assist the business community its staff have committed to providing two hours of their day free of charge to businesses for the next six months.

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