To Open or Not to Open?

Posted on 18/6/2020

Business Advisory

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Overview:

Can opening your doors open up other issues?

With COVID-19 restrictions gradually lifting, many hospitality, retail, fitness facilities and beauty/ services operators are facing the difficult decision of whether to re-open to customers now or wait until operations can return to normal trading conditions. While reopening means welcoming back patrons, bringing in cashflow and getting some of your people back to work; for many businesses, the path to recovery will need to be carefully balanced. Indeed, there are some circumstances where opening your business may actually have a negative impact to your bottom-line profit.

Landlords and Turnover

In this article we wrote back in April and this further piece in May, we discussed how to get on the front foot with your landlord and some of the drivers behind this.

Whether you were successful in pushing for a rent holiday or rent deferral, it is important to keep in mind that most landlord agreements are based on turnover. Any change to your turnover could also have a knock-on effect as to how much of a rent break your landlord is giving you and should be carefully weighed up.

Definitions:

A rent holiday essentially excuses the tenant from paying rent for a specified period, with no increase in payment or late fees incurred.

Rent deferment is where the unpaid rent amassed over the agreed period is split up into the remaining term payments for a higher rent bill after the grace period.

 

Finding the balance

If you are considering reopening your venue or business to take advantage of easing restrictions, it is important assess the desire to get the wheels turning against the profitability of doing so.

In the world of hospitality, for example, according to the Australian Hotels Association, the current restrictions allow most venues to run at around 25% capacity, which may be sustainable for a short period of time but may not cover the cost of licensing, insurance, electricity and the many other bills hotels need to foot in order to operate.

For the retailers who have successfully managed to negotiate with their landlords, the ongoing difficulty of maintaining appropriate social distancing measures means that a restricted number of customers are allowed into the store at any one point. Depending on whether the arrangement with your landlord is based on turnover coming into the business, the advantages of welcoming back customers may need to be weighed against rents.

Similarly, for the beauty and services industries and fitness facilities, there are increased cleaning and spacing costs to consider, in addition to social distancing measures and the turnover flow-on effects to rents described above.

 

Keep your costs in check

The only way to accurately weigh up the costs and benefits of opening (or continuing to open) your doors are through analysing the fixed and variable costs in your accounts,, which you have hopefully managed to keep up-to-date and accurate throughout this time. This is particularly critical now when rent, traditionally fixed, may be variable due to rent relief, and your wages may be being subsidised by Jobkeeper.

Adapting to the various operating and environmental challenges surrounding your particular business relies on having an accurate read of your data, so that you have the confidence to make key decisions as they emerge, ultimately positioning your business for stability over time.

Elizabeth Elliot, Director, Bookkeeping at Perks, highlights the importance of having a clear picture of inflows and outflows in this article.

 

 

Run the numbers

In some cases, there may be more downside than upside to opening up your physical operations too soon.

If you are unsure, it may be worth running various case scenarios to better understand how your projected revenues based on your operating hours costs stack up against any impacts on rents or other negotiations you may have with other banks or suppliers based on COVID-19 related circumstances.

Whilst trading restrictions continue to lift, making sure that you, with the help of your advisers, have a clear vision of what the various levers are that impact your bottom line means that you are not walking into any decision or impact unknowingly.

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