Emerging from lockdown: Recovery, and then business renewal
Two CPAs in New Zealand reveal how they and their clients are rebuilding their businesses as the country emerges from lockdown.
Helen Hawkes | July 2020
New Zealand emerged earlier than its Australasian neighbour from COVID-19 lockdown.
However, its descent into level four restrictions on 25 March was abrupt, with the list of businesses that could physically stay open – supermarkets, dairies (corner stores) and pharmacies – very limited.
“The lockdown period was extraordinarily disruptive,” says Shamubeel Eaqub, of Sense Partners, who has two decades of experience as an economist in Wellington, Melbourne and Auckland in leading international banks and consultancies.
Now, as Kiwis get back to business, we are seeing quite varied speeds across the economy, he says.
“The primary sector is going gangbusters – job ads are up 35 per cent,” says Eaqub.
“Exports, particularly of meat and kiwifruit, are also booming because we have no disease here affecting processing, and forestry exports are coming back.
“But other parts of the economy are down quite significantly, including industries we thought would be quite resilient, like professional services.”
Predictably, hospitality has taken a hit, and construction is seeing a downturn, says Eaqub.
“Globally, there is still a pandemic raging,” he adds, “and we do need to reflect on trade and international travel, a very big part of our economy.”
In a Weekly Economic Update on 19 June by the New Zealand Treasury, two-thirds of the 90,000 businesses surveyed (mainly sole traders or businesses with fewer than 20 employees) reported a reduction in turnover of at least 50 per cent.
An uncertain market in New Zealand
Angus Ogilvie FCPA, managing director of Generate Accounting Group, whose client base is largely made up of wholesale, services and high net worth entrepreneurs, says his firm has been spending a lot of time with clients planning cash flow for best and worst-case scenarios.
“What we are not doing is imagining that everything will go back to normal,” he says. “Businesses have no appetite for that. Most believe, regardless of what industry they are in, that the economy is going to take a tumble.”
Ogilvie says the tourism industry has been decimated, and the construction industry will be affected in the long term by lack of immigration that fuels residential building.
“Once the impact of subsidies wears off, we might start to see a second wave of distressed businesses. I can’t help but think that, in some ways, the wage subsidy has delayed some inevitable decisions.”
Help for businesses has included a weekly payment of NZ$585 for employees who work 20 hours a week or more, or NZ$350 for a part-time employee, based on a 30 per cent or more decline in revenue between January 2020 and June 2020. This has now been extended until mid-August.
Other lifelines include tax delays for small businesses and a Business Finance Guarantee Scheme that allowed businesses with annual revenue of NZ$250,000 to NZ$80 million to apply to banks for loans of up to NZ$500,000 for a period of up to three years.
The last measure, says Ogilvie, has been a “huge disappointment”, because the repayment term of three years proved too hard a condition for many businesses.
Eaqub says banks had to apply their usual credit processes, plus additional steps for the government guarantee, and finance NZ$7 billion of lending in two months, the total amount they lent last year.
He agrees there are question marks over the effectiveness of government stimulus if they prop up business, but customers are not there, and says uncertainty among the general population will impact businesses negatively.
“People are worried about job security and they tend to cut their discretionary spending, while businesses invest less – for example, capital investment is down massively.”
Accounting for recovery
Clients who anticipate difficult trading conditions need to put their oxygen mask on first, says Matt Vincent CPA, managing director of Duberly Vincent Associates (DVA), which has 450 client groups concentrated in construction and the professional sector.
“Asking, ‘What does your business need to deliver to you?’ is key,” he says.
“We have also been talking to clients about key cash flow drivers. What we have realised during lockdown is that some businesses lack financial awareness around their operation.”
During lockdown, DVA did webinars around business continuity plans, government entitlements and business recovery.
“They were about stopping a sinking ship,” says Vincent. “As we came out of lockdown, we asked clients to look at their break-even point from a cash perspective, as well as the risks and goals for their business including finance, human resources, leadership, sales and marketing, delivery and shareholders.
“It didn’t matter whether you were a one-man band or Apple computers. That filtered into an action plan that could be regularly updated and used for accountability.”
Ogilvie says one thing the lockdown has done, from an accounting perspective, is impress upon clients the need to genuinely improve their financial systems.
“It has also forced them to increase their digital knowledge and capacity,” he says.
Pivoting towards digital and other opportunities
Armed with digital bravado or a bit of Kiwi ingenuity, some businesses in New Zealand have found novel ways to survive and thrive.
Global education design company Nanogirl Labs turned around its operational model in less than a week after lockdown, and has pivoted to an online subscription business, tripled its team and created a full production studio. It currently has subscribers in 75 countries.
Vincent says: “A client who, before COVID-19, planned to borrow NZ$100,000 to open a second Pilates studio, has now seen that building an online platform with a paywall is a much more profitable way to do business and with a cost that is one-tenth of a physical premises.”
Another client, who owns a construction company, was able to pick up contracts that larger organisations couldn’t service post-lockdown, says Vincent.
“He did need five more employees, but because he had been able to do a lot of work on the culture and values of the business, he was able to scale up without too much disruption.”
Ogilvie says: “Lockdown has definitely encouraged quite a large number of people to envisage how they might pivot to new opportunities.
“Rather than reinvent their existing business, we have seen more clients start with a clean sheet of paper and create businesses that appear more profitable and promising, or invest in start-ups.
“I have a client who works in the film industry who is looking at making chassis for drones. There is a lot of tinkering in sheds going on.”