2020-05-19 09:11:59Growing a businessEnglishhttps://quickbooks.intuit.com/in/resources/in_qrc/uploads/2020/05/Temporarily-Close-Your-Business.pnghttps://quickbooks.intuit.com/in/resources/growing-a-business/temporarily-close-your-business/Top Questions To Consider Before You Temporarily Close Your Business?

Top Questions To Consider Before You Temporarily Close Your Business?

7 min read

With COVID-19 posing a challenging environment, many businesses are thinking of ways to keep themselves resilient. The constantly changing situation means any incorrect decision can lead to a severe impact on the business and its performance.

In such a scenario, many small businesses are planning to shut down making you think of doing the same for your business. But before taking any decision, it is important for you as a business owner to consider certain questions that can help you make a decision to continue or temporarily close down your business.

  1. What Factors Indicate That I Should Close Business Temporarily?
  2. What Are The Financial And Legal Risks That Can Impact My Decision?
  3. For How Long Can My Business Survive Without Performing Key Business Functions?

Which Factors Indicate That I Should Close Business Temporarily?

Understanding the internal and external factors that can pose risk to your business continuity would help you understand the degree to which your business is vulnerable to the Pandemic. Factors such as business location, industry, culture, management style, business functions and its objectives can help you take the requisite action against business disruption.

For instance, you are the owner of a beauty salon facing the question of temporarily closing the business due to the complete lockdown announced by the government to contain further spread of COVID-19. Following are the external as well as internal threats that salon owner can consider before closing the business temporarily.

External Risk Assessment

  • COVID Cases in Your Location

Number of COVID-19 cases in your geographical location can help you know if you need to temporarily close your business. If number of cases are increasing, you might have to go for temporary business closure. The details with regards to COVID cases in your location can be confirmed from mohfw.gov.in.

  • Lockdown Imposed by Government

Government of India has imposed three country wide lockdowns and recently announced lockdown 4.0 with revised guidelines. As per the new guidelines, containment and buffer zones need to be demarcated within the red and orange zones.

This is because within the containment zones, only essential activities would continue to function such as medical emergencies and supply of essential goods and services. Buffer Zones however are the areas next to the Containment Zones where new cases are more likely to appear.

Therefore, caution needs to be exercised in such areas. So if your business is located in such zones, temporary closure would have to be exercised. Likewise, if you are into hotel, restaurant or hospitality services, temporary closure would be the only option since these are prohibited throughout the country until further notice.

  • Availability of Suppliers

If your business is dependent on suppliers in China or local vendors for inputs or input services and they have temporarily put supply on hold, such a supply disruption may impact your business.

For instance, businesses in industries such as automobiles, renewable energy etc are feeling the heat. This is because 10 to 30 per cent of the raw materials in automobile companies are sourced from China.

Likewise, renewable energy sector is dependent on China for 80% of the sector’s need for solar panels.

If your business operates in such industries and have limited alternatives for vendors, temporary closure is a possibility.

Internal Risk Assessment

Much like the external assessment, you must asses the internal factors that can act as a risk to your business. If your business is vulnerable to a financial turmoil, you must figure out:

  • Alternative sources of revenue such as online delivery, online consulting etc.
  • Come up with a business survival plan for the short term
  • Plan for the supply disruptions likely to be faced by your business
  • Undertake a cost benefit analysis of temporary closure vis-a-vis continuing your business

What Are The Financial And Legal Risks That Can Impact My Decision?

Financial Risk

  • Cash inflow outflow status of your business, that is, how much cash reserves you have to survive the pandemic for the next three months.
  • The amount of money available to disburse employee payments. If that seems difficult, planning on reducing employee payment expenditure which could include layoffs, reducing contractual labor etc
  • Considering the cash conversion cycle, that is, figuring out possibilities to accelerate receivables, delay payables and keeping inventory in buffer.
  • Working on variable costs such as exercising travel bans if possible, limiting unnecessary meetings, ceasing hiring etc.
  • If you are receiving input or input services from your vendors and need to pay them for the same, come up with a short term plan determining the way ahead. Communicating with suppliers with regards to changes in inputs or input service requirements and managing the vendor cost for the short term period could be one of the ways to survive the pandemic.
  • Lines of credit or other sources of finance available to meet working capita needs,
  • Debt obligations that need to be met and coming up with ways in which instalment money can be delayed or met as per the situation.
  • Evaluating the schemes rolled out by government to support MSMEs and see if you are eligible to avail the benefit. Read the article on India’s 20 Lakh Crore COVID-19 Relief Package to know more.

Legal Risks

With the uncertainty surrounding your business owning to COVID-19, the guidelines issued by the local, state and the central government are changing rapidly.

For instance, the government in its mandate for lockdown 4.0 imposed restrictions on businesses to remain closed in certain sectors such as restaurants, hospitality, entertainment, malls etc.

You as a business owner need to be updated with the latest announcements and notices issued to understand if you are legally bound to close your business temporarily until further notice. This is because if you fail to do so you would be violating the containment measures adopted by the government for the spread of COVID-19 and would be liable for offences and penalties under section 51 to 60 of Disaster Management Act and under section 188 of IPC.

Furthermore, the government has come up with Employee Safety and Legal Preparedness Plans which you as an employer need to know in order to minimize the employee risk of infection.

Thus,as per Harvard Business Review, you need to consider the following things to avoid any kind of legal risk:

  • Be informed about the guidance issued by the government for public health and employee safety.
  • Communicate aggressively to your employees about hygiene measures so adopted. Furthermore, employers need to ensure that proper facilities are provided at workplace that ensure employee safety such as hand washing facilities, hand sanitizers, disinfecting the surfaces etc.
  • Impose limitations on employees coming back for work. This could include restricting the employees who are sick to come to office and formulating policies for how and when such employees can join back.
  • Understand and analyze the legal obligations to provide leave to employees in the case of sickness.
  • Understanding your responsibility for reducing stress and anxiety faced by your employees due to COVID-19. This includes giving flexible working hours, leaves etc to employees if need be.
  • Taking care of the employee privacy in cases where he or she needs to disclose personal health details.

For How Long Can My Business Survive Without Performing Key Business Functions?

It is extremely important that you analyze the maximum time your business can survive being closed in the pandemic. This involves identifying important business functions and understanding or determining how long your business can survive without performing thede functions.

Ask yourself the following questions that will help you decide between temporary closure and business continuity:

  • What is your main product or service?
  • How do you produce such product or service?
  • Main events that can impact your business?
  • What other business functions does your business undertake?
  • Which business functions have legal, financial or contractual obligations?
  • What is the outcome if business functions cannot perform?
  • Can your business survive without a specific function?

The government’s across the globe are moving towards stricter social distancing and ‘shelter in place’ orders to contain the increasing COVID-19 cases. This has lead to a severe decline in demand, supply disruptions and fears in recession which the governments across the globe are trying to deal with through fiscal measures and bailouts.

Typically, it is important as a small business to identify the possible threats and understanding the severity of such a threat. Such a risk assessment will help you identify:

  • The potential critical threats to your business
  • Likelihood that such threats would affect your business
  • The severity of the event or the threat
  • Impact such a threat would have on your business

 

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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