Bush Fires And Business Interruption

By Brad Tonks

28 February 2020

Following the devastating impact from the recent bush fires, national and international communities have rallied to support those most affected. Regrouping and rebuilding though will be a massive challenge on many levels.

These issues will extend beyond the individuals initially displaced by the bush fires and will likely see a heavy impact on businesses that provide goods and services into these areas.

Many relief and disaster assistance options have been announced for families, small business and primary producers, including:

  • Various Federal and State Government grants and low interest loans;
  • Support from major financial institutions to assist customers facing financial challenges; and
  • Support from charitable organisations to assist those most affected.

Rebuilding often requires additional commitment and therefore a greater level of exposure to risk. It is critical that businesses consider their future viability from the outset and work towards a clear, effective and proven business model. The successful implementation of that model will rely on the competence of its management and often on the experience of their advisers as well.

Understanding a business’ access to financial resources is essential in determining whether it can persevere through the temporary business interruption caused by the bush fires. The first consideration is often whether insurance cover has been taken out and whether that is sufficient to:

  1. Rebuild and return the business to a condition that will allow it to resume profitable trading; and
  2. Cover the loss of income until the business can again be restored.

The level of financial resources available will be a paramount consideration, including insurance covers, and will determine if a business has the capacity to recover from an interruption.

Even if those financial resources exist, you may need to be prepared for a significant time lag to get things back up and running. In the meantime, employees must be paid, and supplies obtained in addition to the costs of repairs and recovery. Banks, financiers, the ATO and others will also want to know what the timeframe will be for the business to recover. 

A recovery plan needs to be navigated closely through a detailed cash flow forecast. It is vital for management to be realistic in their analysis of cash flows and the quantum and timing of payments as a failure to provide timely and accurate forecasts can lead to a breakdown in creditor relationships and result in them commencing legal action. It is also important to note that preparing an initial cash flow forecast is only the start. Progress against the forecast also needs to be monitored closely and regularly to ensure that the business remains on track and that future assumptions remain reasonable.

PKF can assist with formulating and maintaining realistic cash flow budgets. As trusted advisers to businesses and financial institutions, we can add value and credibility to forecast and assist with effective communications to stakeholders.

In severe cases, we can also put in place formal restructuring plans, seek moratoriums with creditors and negotiate new terms with financiers to give a business the breathing space they need to implement a recovery plan.

Remember, the earlier professional advice is sought, the more successful the outcome is likely to be.