Has your business discredited due to the COVID-19 scenario?
You must understand the value of a business, if you are merging, selling, acquiring or inviting new investors.
Do you know to what degree does the pandemic influence on value?
Should you hold the company to pre-Coronavirus Performance by relying on the fact that you will eventually come out of this sooner?
The prices that you are offered depends upon the eagerness of parties. But, in order to understand the value of a business, the pandemic COVID-19 necessitates a deep analysis of investigation beyond the norm.
However, you cannot simply avoid the circumstances of pandemic and focus on pre-pandemic financials and performance, even if you are enthusiastic about the future. Prior to this condition, anyone who had to sell or buy would consider figures of past three years to determine value, but this historical data may no longer show an accurate picture. For many of the businesses, this history will be no longer reliable to understand the fair value.
The controls deployed by authorities for transmission of COVID-19 like social distancing, travel restrictions, have an influence on the economy. Distancing and the closures influence in distinct ways and are required to be considered at industry and individual business level.
The stimulus packages of government could also be providing abnormal short-term outcomes. The valuations rely on present and emerging risks and predicted business environment.
This analysis is then brought to valuation conclusion and modeling. COVID-19 has created its considerations for analysis that includes:
• Influence of COVID-19 at the business level and economic industry sector.
• The supply chain across supplier and customer base to identify the possible impact of COVID-19 on the supply chain.
• For 2020, in-depth analysis is required with possible segmentation by quarter.
• Risk associated with COVID-19 for an implication of earnings multiples.
• Assumptions related to COVID-19.
We can consider here a hypothetical example of a printing business. The business has been establishing for 10 years, and always had profitable operations with revenues estimating $5-6 million and EBIT $800 to 900k yearly for last 3 years.
The business has over 400 client active accounts. The trading partners seem to be consistent before March 2020. However, from March to June 2020, there was a downturn of 40% with closed business or working on a limited roster for a period of 8 weeks during lockdowns of COVID-19. Now the business has come back to normal operations but it is not reflected in the revenues. The influence of COVID-19 in this type of situation could be discounted as the firm seems to be returning to normal conditions and has a solid history of trading and earning profits. Some of the customers have resumed with pre-COVID-19 printing order levels. A huge chunk of customers is desired to spend between $5 to 20k each year with the business.
This industry approach method shows a reliable indicator of value and it works best in a stable and active market where the latest history is an efficient indicator of the present. However, COVID-19 shows doubt on the reliability of past sales that occurred before the conditions of a pandemic.
This method analyses future maintainable earnings of the business and the value of asset surplus to core business.
If you have purchased a business and want to complete it full dedication or you are looking to merge, sell or engage with investors, contact us now for more details on these crucial steps.
Update for Jobkeeper
Some additional employees might have hold eligibility for JobKeeper, with the employee test date for JobKeeper moved to July 1, 2020. The monthly business declaration for JobKeeper in August is due by September 14th and is quite different to previous forms as it contains three JobKeeper fortnights.
Employers are required to be assured that they analyze all additional workers who could hold the eligibility for JobKeeper to assure that they comply with the “one-in, all-in” aim. They must also meet the requirements of nomination.
The employers are required to again assess their eligibility with reference to actual GST turnover for month of September 2020 quarter. This is for JobKeepeer payment from September 29th, 2020 to January 3rd, 2021.
Basic Question of the Month – Shall I pay tax on COVID-19 grants?
The question here is
If my business is receiving grants from the State Government, Shall I pay tax on it?
Income Tax- The income tax grants are likely to be taxable unless these are excluded from taxes specifically. If the grants are related to the continuation in the business activities, then it is likely that these will be involved in assessable income for the purpose of income tax.
This position could be different in some scenarios in which the payment is made so that the individual can begin new business or cease to carry on a business.
Goods & Services Tax- The grants of authorities are not subject to GST unless it is for the supply of something. According to ATO, cashflow boost and JobKeeper payments are not subject to GST this seems to rely on the basis these are not considered for supply. In general, we glance at whether the entity has anything to do with obtaining payment or grant. This can involve entering an agreement or refrain from doing something. If not, then there will not be any GST as no supply has been conducted.
Calculations of JobKeeper turnover- The GST must not be included in the decline in the turnover test for the initial phase of JobKeeper if GST does not apply to the grant. This exception holds to the university sector in which commonwealth Government financial aid given is involved in JobKeeper turnover tests.
Predictions at the time of the pandemic
How to make planning for uncertainty when the assumptions are subjected to change?
The business operators must have plans that are required to be managed during uncertain times. Either your business is directly influenced by it or not, it is possible that your customers, workforce, and supply chain could be influenced.
Analyze where your business stands
You should understand that where you are standing. Nowadays businesses fail for a number of reasons; however, the precursor is a failure to understand what is occurring and what to analyze. Managers must understand the problem and come up with certain solutions for these before the situation worsens. If you don’t have any idea regarding the basic drivers of the business, the things that make the difference between doing well and going under, then it is the relevant time to find it out.
Analyze the cost structure
Do you have any idea of the real cost of your business?
The breakeven point of your business is the sales activity in which your business neither concludes with profit or loss. By dividing fixed expenses by gross profit margin, you may calculate the breakeven point. The resultant figure shows the level of sale income that is required to breakeven. When the supply chains are influenced, knowing about the breakeven point is very significant.
The breakeven point is crucial the monitor the performance of the business. It is also relevant in finding whether to give any concessions or not. If the breakeven point is less than the current operating level then you hold a good buffer in profits. With this, you can efficiently manage growth, opportunities in investment in capital, and assure your protection against downturns.
Before you answer, “Obviously I know this”.
I would like to ask, “In actual, do you put this theory into practice?”The biggest businesses have also been caught this and tie up the important resources in non-profitable products and projects. You’re not cheating people by putting the prices high during downturns.
Cutting off the prices creates an influence on profits. By providing discounts, you are even giving away some or all of the profits. The basic notion here is to analyze the impact and go as far as you can. To exemplify, businesses with a gross profit of 30% which provide reductions of 25% require a 500% increase in the volume of sales to maintain the same standard position. In most cases, it does not happen. Consequently, the business trade even below to its breakeven point and comes out with a loss.
If your business requires cash instantly, offering reductions could be the method to shift stock, but consider the implications.
Plan, analyze and alter
Your budget must be the best estimation of what is likely to be created on the basis of your existing knowledge. To handle the changes, you can scenario the plan where the budget acts as a baseline, you can also predict the good and the worst cases on the basis of risks and the likelihood.
Another method is making use of the budget as a base and daily review and adjusts it depending upon certain conditions. The biggest risk of your profit could exist from the cost structure.
Watch the cost structure and make essential cuts wherever possible. Remember not to discard the mandatory revenue-generating capacity that is required. Deficiency in profit could deteriorate the business; however, less cash can even worsen the scenario. Often the businesses fail as they do not handle the cash efficiently.
Follow three steps:
Planning, tracking, and measuring the cashflow. Try to handle the debt levels wisely. The banks will be closely monitoring the accounts of customers and there is nothing wrong in debt.
Ensure that you understand all the terms of the loan if you are availing ones. The banks could be more relaxing in this past, but this year the whole picture differs. You must contact your bank early if you feel that you need funding and do not wait till the last moments. You will be required to present the information such as “why you need the debt?”, “For how long you need it?” and “when it will be paid?”
The aspects such as operating budgets, cash flows, cost control and debt management are part of the business management. These must be controlled to reduce your risk position.
Acknowledge the external conditions
The implication of COVID-19 is beyond the economy, it has also altered the functioning of the businesses and consumers act. The pandemic has halted the economy perturbed the supply and demand chain as fewer people are working. The federal budget is to be released on 6th October and it is expected that authorities will invest more in projects that fetch more jobs.
Many of these will be concentrated on the implication of infrastructure. Each of them will have a flow-through effect to the wider economy. Understanding the supply chain is very crucial. Manage risk and plan for altering conditions. Like “What is the efficiency of your business to handle gush in demand?”, “Are you having a limited supply base?”, “What would happen if the supplier gets bankrupt?”
You must assess, understand, and manage the risks.
This week Australia is expected to face a formal recession. It is not bad news at all as the revenue is no longer declining for most Australian businesses. The recent data by ABS shows the influence of COVID-19 as fewer businesses reported a decline in revenue in august as compared to the month of July. 35% of the businesses expected it very difficult to meet the financial commitments over the next three months.
The conditions improve in the second half of 2020 and will steadily improve over 2021 and 2022.
The investment in the business is also expected to be flat with a survey by ABS. The spending on IT hardware and software, equipment, and machinery were amongst the top in the list. Generally, the bigger businesses are paying down the debt rather than spending, small and medium businesses have not extended debt to fund the investment.
Reliable Bookkeeping Services adheres to assist you to provide you an insight of your business’ performance. Contact us now to find how we can give you the appropriate intelligence that you need.
Our bookkeepers in Melbourne will get daily insights after the budget and you must look for the opportunities that your business can avail.