Essential Business - a financial health check

Recent events have proven, over and over again, that the daily risks that face our physical health are deeply interwoven with the risks to our financial health.

Whether we like it or not, they’re two sides of the same coin. Ignore one at your peril. As Sally McManus, Secretary of the Australian Council of Trade Unions, has consistently pointed out:

The most important thing for public health is to ensure everyone knows that if they have to self -isolate that there is not going to be a financial penalty for them and their family. If working people are forced to choose between going to work sick or being able to pay their bills and feed their families then we are creating a disaster scenario for public health.

And the risks extend out from there. Many states remain in lockdown limbo, and small businesses bear the brunt. Even before the recent spate of lock-downs, many individuals and small business owners around Australia were experiencing financial devastation. In April 2021, 31 percent of individual respondents to a survey indicated being financially stressed, which was higher than the proportion of people saying they were making ends meet (26%). The group of people most vulnerable to adverse income shocks are those people on fixed term contracts and casual contracts. Similarly, businesses report significant decreases in revenue, and 16% indicated they were going to find it very difficult to meet their upcoming financial commitments. Many businesses have become insolvent over the past 18 months, and many more are projected to fail as the government pulls away the safety nets.

While nobody could have predicted the pandemic and its life-changing impacts on communities and the economy, things were already on shaky ground. The ripples caused by the GFC were still being felt and the spate of natural disasters that increasingly plague Australia (and everywhere) also place our physical, mental and financial health at risk.

If all this sounds catastrophic, well that’s because for many it is. R U OK? day was recently held on September 9. Billed as an initiative to reach out to those who may be struggling, its aim is to start a dialogue. By checking in with those around us we potentially start a conversation that can ‘change a life’.

Of course, money issues are some of the hardest to talk about. Even with those closest to us it can be a no-go zone. Yet, there still may be some worth in considering the four steps to starting a conversation (even with yourself) suggested by R U OK? day:

1. Ask R U OK?
2. Listen
3. Encourage action
4. Check in

1. Ask R U OK?

When people are struggling financially, they are overwhelmed and don’t know who to turn to for help. Financial problems can seem insurmountable. There can also be a great deal of negative feelings associated with money, such as being a failure, shame, and embarrassment.

Starting a conversation with a person you suspect is struggling may be difficult but it also might help get them back on track. If it’s yourself that is of concern, write down your financial challenges. Try to download everything that is circling around your head. Committing your problems to paper gives them definition and reduces the mental strain of thinking about them endlessly. Seeing the issues written out clearly is the first step you can take in starting to accept the situation and move into action. After asking yourself R U OK?, and finding that you’re not, try talking to someone you trust about your situation.

And if there's no-one you can talk with, there are other resources available. Beyond Blue provides mental health support services. You can contact them through their website or by calling 1300 22 4636.

2. Listen

Listen to what you’ve written down on paper is telling you. If someone is confiding in you, pay attention. We often assume as the listener that our role is to solve the problem. But this is not necessarily the case. Sometimes, when it comes to money, we might not be in a financial position ourselves to help, and therefore less willing to listen. But often it is the listening that is important, not the solving. As Brené Brown states;

If we can share our story with someone who responds with empathy and understanding, shame can't survive.

So, listen, and listen closely.

3. Encourage Action

We’ve asked the question. We’ve been honest (with others and ourselves) and we’ve listened. Now it’s time to act. There are a number of actions you can take if experiencing financial hardship immediately. Don’t be overwhelmed by the following list, and don’t feel like you have to do everything as quickly as you can. The aim of the list is to provide options. Peruse the following and decide on what’s right for you. Do one pro-active thing, make one phone call, or check out one website. Take one small step that feels right for you.

Seek professional advice

Who to ask depends on the advice needed, but you can pay for advice from an accountant or financial advisor, or seek free advice from a financial counsellor or a Centrelink Financial Information Services officer. Business owners may miss out on grants or subsidies that the Government has provided if they aren’t aware of the full spectrum of opportunities. Professionals can help understand all of the support available and will help navigate complex rules and application systems.

Understand your future cash flow. 

Understanding your cash flow is essential for good planning. You may have heard the phrase “cash is king”. It’s very important, especially in a crisis, to set up a spreadsheet with estimates of your current and future income and expenses. This spreadsheet can identify weeks or months of expected deficits, and you can take pre-emptive action to reduce the losses or identify when you will need to draw down on your emergency savings.  If you are not good with spreadsheets, the MoneySmart Budget Planner is helpful, as is accounting software that may do it for you, or seek the advice of an accountant/financial advisor.

The financial impact of COVID-19 has meant that many individuals and businesses have found themselves unable to make payments on loans and credit cards. But don't let this cripple you, many lenders are offering to help borrowers who are in financial hardship because of the pandemic. Contact your lender as soon as possible to find out what options are available. Give them 30 days to look at your situation and provide a response.

When immediate needs are met, there are more actions you can consider taking to help build resilience to future financial disruptions:

Boost emergency savings. 

Establish an account that is not to be touched, except in emergencies. There are some rules of thumb about how much should be kept in this account, such “three to six months of your expenses”, but don’t stress if that’s impossible. Money from this account can be used to pay the excess on insurance policies if you need to make a claim and to pay expenses if income is lost, such as in the event of sickness, job loss or business closure. If you don’t have sufficient savings now, set up an automated direct debit to transfer a regular amount weekly into this account to boost the balance. Even five dollars a week …it may not boost your savings quickly, but it’ll feel good all the same .

Income Risk

All of us need to consider the riskiness of our income and use our financial wealth to diversify this risk. The daily news constantly reminds us small business owners have very risky incomes, given their income is subject to the various factors that affect the success of their business, including competition, regulation, changing technology, rising expenses etc. And then there are the lockdowns. If both adults in the household work in the same business, as is common with mum and dad businesses, then the household is subject to very high-income risk if that business closes. Business owners in this situation should ensure they are protected with insurance as much as possible, have high levels of emergency savings, and have reduced exposure to risky financial investments such as the stock market.

Individuals in public service employment and industry’s robust to pandemics like in the health industry, are perceived to have much safer income. While all jobs can be the subject of redundancies, the likelihood is lower for these types of jobs. These people can afford to take some more financial risk, such as shares (notwithstanding other factors that should be considered).

Couples should consider how risky incomes are between them. Are they both employed in the same industry? What is the likelihood of job loss in a crisis? Is there anything they can do to reduce this risk? Similarly, businesses need to consider the diversity of income sources and range of customers/clients.

4. Check in

Finally, ensure you follow up with your friend to see how they are going. If they are struggling to take action, offer to keep them company while they visit a financial counsellor or make a difficult phone call. Integrating a social outing into difficult tasks can reduce the cognitive and emotional burden.

We need to regularly check in with those closest to us, to remind ourselves that this too shall pass, and that we’re worth it.

Dr Tracey West has a strong background in household finance, with several publications on household finance, financial literacy and financial planning issues, including a PhD thesis completed in 2016. Recent work has been published in Economic Notes, Financial Counselling and Planning, Financial Planning Research Journal, Journal of Family and Economic Issues, JASSA, the Consumer Interests Annual. This work contributes to knowledge on investor behaviour, informing curriculum development and guidance for advisors in the financial services industry. She currently teaches Behavioural Finance and Wealth Management at Griffith University, Australia.