Challenging times ahead

With a recession anticipated next year, businesses should be looking to protect their interests from the ill-effects of an economic downturn.

In this article we explore 10 things that your business should prioritise in order to weather the upcoming financial turbulence.

1. Look after your staff. For now, unemployment remains low and the labour market is tight. Any recession is likely to impact heavily (and first) on households. Your talent is likely to have many good ideas about shock-proofing your business. At the very least, you should be managing expectations and providing as much certainty as possible.
2. Reach out to your customers. Maintaining strong relationships and loyalty in customers helps ensure a reliable cash flow. Customers are still seeking comfort about the integrity of their supply chain, so be clear about what your business can offer at this time, and what your payment terms will be.
3. Make sure your paperwork with your customers is up-to-date. Now is the time to make sure you have “doted the i’s and crossed the t’s”. Do you have signed contracts? Did you receive the guarantees you were promised? If you are supplying goods on credit, do you have an enforceable security agreement for those goods and have you registered a financing statement on the PPSR?
4. Maintain good relationships with your key creditors. No one likes unpleasant surprises, particularly lenders, and full and frank discussions as early as possible will leave more options on the table. In our experience, most creditors want to work with their debtors to find an outcome that works for both parties. We suggest you keep a careful eye on the covenants in your bank facility documentation and make sure you comply with those covenants – or seek a waiver if there are any issues.
5. Consider options for reducing debt, particularly before further interest rate hikes. If debt is getting out of control, take prompt action and talk to your advisors about your options.
6. Reduce costs where possible. Maintain an accurate financial position for your business, prepare and monitor cash flow forecasts carefully, and check underlying assumptions to ensure that they are realistic.
7. Do your due diligence on counter-parties. You want trading partners who have a good track record and financial resilience. Ask for financial information and gain an understanding of how well-placed your suppliers are to continue to do business in tough times.
8. Seek trusted professional advice early to identify the best options for your business if it experiences financial distress. Make the most of the insights on offer from your lawyers and accountants. Stay in touch with relevant industry groups.
9. Reach out for support if needed. Especially during difficult times, looking after our mental health is important, and there are resources available to help. Some financial support is currently available from the Government, as well as relief through the IRD off the back of COVID-19 impacts.
10. Keep directors’ duties front of mind. Directors must act in good faith and in the best interests of the company. A director should not commit a company to new obligations unless she believes, on reasonable grounds, that the company will be able to perform those obligations when it is required to do so. Further, directors should avoid taking illegitimate business risks. The recent Sequana decision tells directors when they should be putting the interests of creditors first. The Supreme Court’s decision in Mainzeal is expected to provide much anticipated guidance (and hopefully more certainty) for directors.