Protecting your business as insolvencies rise

insolvencies, insolvency

With $274 billion in mortgages and small business loans currently deferred and 2.1 million Australians predicted to be taken off JobKeeper by the end of this year, it’s clear that we are on the brink of an insolvency crisis.

For businesses, it means that the challenge is coming. Whether it’s cutting costs, reducing staff or negotiating reduced wages, a decision made in the heat of the moment can have significant impacts on the long-term viability of the business or result in legal action.

The holistic approach to reducing cost base

The first priority for businesses should be in assessing where their customer base is, the ongoing needs of those customers and how the business can continue to provide them with value.

The reality is, however, that businesses with a reduced income will ultimately need to reduce their costs to be sustainable. So, without taking their eyes off the needs of customers, businesses will need to consider the intricacies of their cost base; weighing up the money coming in versus the money going out.

While the first instinct might be to reduce employee numbers, it can be a reactive and fairly short-term response. There are other – more holistic – ways to reduce your cost base reality before the reduction of staff overheads.

Consider instead real estate spend, discretionary spending or the cost of goods. Introducing flexible working, reduced hours or even taking pay cuts amongst management and staff collectively can also stave off job losses. Shorten your cash cycle by reducing your sales cycle, delivering goods or services more swiftly or managing your billing and payment cycle more effectively.

Change might be unavoidable

Despite best efforts, many businesses will find themselves in a position where they need to restructure and will find themselves with one of three options – ignore the issue and go insolvent, have discussions with employees and handle them poorly (likely ending in dispute and litigation) or handle discussions effectively and preserving relationships and avoiding disputes.

Avoiding the costly, damaging and painful parts of disputes including litigation and in some instances public reputational damage is key, but the reality is, when people get desperate, their reactions can be mixed and varied. Businesses should aim to make changes without alienating employees, partners or investors, by enabling early deal-making to resolve disputes rather than fostering aggressive positional battles.

Trust and transparency at the forefront of communications

Trust is foundational and businesses with a transparent and open relationship with their employees are likely to navigate the process of restructuring their business with greater ease. It’s something, however, that can’t be built overnight which is where a third-party independent facilitator or mediator can be extremely valuable – someone to guide and support the process.

Talk openly with your employees about the plans in place for navigating the current climate. You may not have certainty but clear communications will reduce anxiety and create a greater sense of team.

It doesn’t mean don’t make difficult decisions. Instead, facilitate compromise by helping employees to understand why the decisions are being made. If you’re struggling to have those conversations effectively, consider using a mediator or facilitator to work through the issues, find common ground and form agreements before things head south.

Quite simply, it’s about doing the right thing and facilitating compromise rather than hostility. There is an increasingly important role for external mediators and facilitators to support Australian businesses and entrepreneurs get back on their feet by using their skills to ensure that the conversations that need to be had between employers and employees are handled clearly, consistently and compassionately.

Nick Northcott, Executive Director, Immediation