Responding to Covid-19
COVID-19 represents a formidable challenge to businesses of all sizes. Necessary policy responses have caused significant disruption to the global economy, with simultaneous demand, supply and financial shocks. Most businesses are experiencing a sharp decline in near-term revenue, requiring actions to mitigate the impact on cash flows and potentially to secure additional funding.
Based on our own experiences with clients on turnaround and performance improvement programs, we have developed a strategic framework to assist businesses in working through their response to COVID-19. There are three key elements to this framework:
- Ensuring immediate business continuity
- Securing the near-term financial viability of the business
- Positioning the business for medium-term strategic opportunities
COVID-19 - A Global Pandemic
COVID-19 has a fatality rate around 20 times that of seasonal flu, with an estimated average rate of 2% . Fatality rates increase dramatically with age, with fatality rates of up to 20% observed in the over-80s population. Unless suppressed, the high fatality rates among the elderly population and those with underlying medical conditions would overwhelm the capacity of national health systems.
Public concern and the policy response to COVID-19 has caused significant disruption to the global economy, with simultaneous demand, supply and financial shocks. Coming off elevated valuation multiples, stock markets around the world have responded by posting their worst performances since 1987.
In an attempt to contain the economic fallout, central banks around the world have responded with rate reductions. Governments have also announced various fiscal measures to support the economy. Although welcome, these monetary and fiscal measures in themselves are unlikely to make much difference to the outlook for most businesses.
COVID-19 Strategic Framework
The first stage of the framework is about stabilising the business and preserving cash to underpin near-term viability. Having created a sustainable business platform, consideration can then be given to the medium-term strategic opportunities that the current market environment creates. There is no current consensus on how long it will take for COVID-19 to play out, but well-capitalised companies will be in a strong position to benefit from stimulatory growth measures and industry consolidation opportunities.
Ensuring Immediate Business Continuity
The first stage in the strategic response to COVID-19 is to ensure the immediate continuity of your business given the potential for staff dislocations and supply chain disruptions.
Business continuity measures being adopted by companies typically fall into the following categories:
- Crisis response
- Employee arrangements
- Supply chain stabilisation
- Customer engagement
- Working capital assessment
- Other stakeholder assessment
Securing Near-Term Viability
We recommend the following approach to securing your near-term viability:
We therefore recommend developing a cash-flow scenario model. The purpose of this model is to show what your future cash flows might look like under a range of possible assumptions for the extent and length of the downturn. Given the uncertainties inherent in forecasting the outlook, this does not need to be a complex and detailed budget model. Instead, it should be a high-level (20-50 line) representation of the business.
• Existing cash at hand
• Existing debt facilities
• New debt facilities
• Factoring (e.g. invoices, credit card receivables)
• New equity investment (existing shareholders or new investors)
• Government support
Comparing this funding assessment with the cashflow scenario profiles generated previously will provide an indication of the degree of risk to the near-term sustainability of the business. Most businesses will need to undertake some form of cashflow mitigation strategy, but the level of urgency and extent of these mitigation strategies will depend on the assessment of this degree of risk.
Cash flow mitigation strategies are designed to stem revenue losses, contain costs and manage working capital over the next 12-18 months. Specific strategies to mitigate negative cash flow will vary according to the characteristics of each business, but areas of possible focus are likely to include operational and overhead cost initiatives, a range of revenue mitigation strategies, and a focus on working capital ratios.
Positioning for Medium Term Opportunities
Although the timing of the recovery is unknown, the combination of loose monetary and fiscal policy, together with a relaxation of social distancing policies when the time is right, have the potential to trigger a strong recovery. Indeed, a number of commentators are forecasting a rapid rebound in the economy, with prior epidemics such as SARS, H3N2, H2N2 and the 1918 Spanish flu following a similar recovery path .
Those companies that secure their near-term viability may therefore be well-positioned to benefit from significant growth opportunities within a 1-year timeframe. Furthermore, the current dislocation creates specific opportunities for well-capitalised businesses or private equity funds to pursue new acquisition opportunities at substantially reduced valuations. Deals that in normal times would get queried by competition authorities are likely to be viewed much more leniently when the alternative to an acquisition is for a business to fail, exacerbating rising unemployment. Therefore, for those companies that are able to mitigate near-term cashflow challenges, the next 6-9 months could be a critical period in positioning your business for the next chapter in its growth.