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Jirsch Sutherland partner Andrew Spring, who has handled voluntary administrations for a number of fashion groups, shares how fashion retailers can navigate financial distress.

Just before COVID hit in early 2020, I wrote a piece about the challenges being faced by the fashion retail sector. At the time, there were two key themes: the need to consistently release new ranges throughout the year, in addition to traditional seasonal ranges; and the importance of investing in e-commerce platforms.

Just a month later, when the pandemic was declared, the world as we knew turned upside down. The fashion industry as a whole – designers, manufacturers, retailers, marketers, and event hosts – must have suddenly felt like they were being asked to walk on water. Survival was brought about through pivoting towards the online shopping boom. It quickly became apparent just how crucial it was to have an online presence. However, even those that were proficient in the digital realm encountered difficulties with predicting the rapidly evolving demand for a ‘lockdown’ wardrobe. For perhaps the first time in history, unless you were a TV anchor, the ‘waist up’ approach to getting dressed was widely adopted. In a world that was focused more on a toilet roll supply, DIY home projects or sourdough recipes, the lustre of the fashion industry had dulled.

The next set of challenges came through supply channels. The fashion industry is renowned for its long lead times from concept to commercialisation. But when you add in the disruption to production and delivery schedules, caused by lockdowns or border controls, the challenge of navigating the fast-moving changes in demand might have felt like flying a jumbo jet in a Red Bull Air Race.

Once the lockdowns ended and the country opened up, people could get out and about again, and having a physical as well as a digital presence became vital for many companies. Yet another pivot!

Today, the sector (like many other industries) is facing different challenges: a high inflationary and rising interest rate environment, geopolitical tensions, the increase in the buy-now-pay-later sectors, greater global competition, ongoing supply chain and labour shortages, depressed consumer sentiment and customers reining in their budgets after months – if not years – of discretionary spending. Banks are also enforcing tougher conditions on distressed business borrowers, while the Australian Taxation Office (ATO) is cracking down on business owners/company directors for any unpaid tax debts.

The ATO currently has an amnesty in place for eligible small businesses that are behind in their tax lodgements. But it’s estimated that small businesses owe the ATO $30 billion and, put simply, it wants its money.

Unfortunately, there has been a number of fashion companies entering insolvency or restructuring their businesses over the past 12 months as the impact of the last few tumultuous years and the current economic headwinds take their toll, including Alice McCall, Luxury Retail No.1, Sneakerboy, Missguided and EziBuy. That’s why I believe now is a good time to be conducting a business health check to determine how your business is faring.

Start by asking yourself the seven following questions:

  1. What is your outlook for the next 12 months - Are you confident or pessimistic?
  2. Is your balance sheet different to last year?
  3. Are the company’s director(s) and/or employees more stressed compared to last year?
  4. How does your cash-flow compare to last year?
  5. Have your profits been negatively affected?
  6. Has your exit/succession plan changed?
  7. What is the biggest single challenge to be addressed in the next 12 months?

If your response to any of these questions raise concerns, it’s time to dig a little deeper and see if any of the red flags below are evident in your business.

12 red flags that may indicate your business is in distress

  1. You have accumulated tax obligations that you cannot immediately pay
  2. Poor cash flow – using current sales income to pay old debts
  3. Inability to access finance or further capital
  4. Can’t pay superannuation
  5. Can’t pay your bills on time
  6. Securing special payment arrangements with creditors
  7. Unable to produce management reports: financial performance or forecasting.
  8. Loss of customers or a downturn in sales revenue
  9. High staff turnover and lower competence
  10. Physical deterioration or poor appearance of your business premises
  11. A substantial bad debt write-off
  12. Business owner and director disputes

If you recognise any of these signs, then early action is crucial, including seeking advice from a qualified and independent adviser about your company’s financial affairs and the options available. Early intervention could mean the difference between turning a business around or needing to close the doors.

While you’re seeking counsel from an expert, make sure you keep your management and relevant personnel informed about the situation. You should also identify the reasons behind the warning signs in your business and review your financial position, so you have the most up to date information available to hand. Above all, it’s important to prepare a strategy to deal with the issues – something you can do with your adviser.

Finding the right solution

When people hear the word ‘insolvency’ they automatically think it’s the end of the road. Insolvency is not a destination, it is a financial state that can be worked through with the right guidance, decisions, and support. Think of insolvency like being lost in the bush. The first step is to acknowledge your situation, then to call for help, then to find shelter, food and water to sustain yourself until help arrives to guide you back to the path home. Over the years, we have worked with and helped many businesses find their way back to the path to profitability, using processes such as Safe Harbour, Voluntary Administration, and, since its inception in January 2021, the Small Business Restructuring (SBR) process.

Safe Harbour
The Safe Harbour legislation protects company directors from personal liability for insolvency trading if the company is undertaking a legitimate restructure which is reasonably likely to result in a better outcome for the company and its creditors than the immediate winding up of the company.

Voluntary Administration (VA)
A VA gives an insolvent company breathing space, by creating a moratorium on creditor enforcement actions, while a rescue proposal can be formulated for consideration by those creditors. Usually, a company’s business will continue to trade throughout this process.

Small Business Restructuring (SBR) process
SBR is a simplified debt restructuring process for eligible small businesses that involves proposing a plan to your creditors on how you can restructure your debts. Like a VA, it gives business owners breathing space while the proposal plan is prepared and you retain control of your company throughout.

The fashion sector is facing a number of challenges, and if your business is in financial distress, it’s important to understand that while it might not be your fault, it is your responsibility. By recognising the signs of distress and acting on them early, you’re better able to give your company the best chance of survival.

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