Surviving
COVID19
The COVID 19 pandemic, and government measures to contain the COVID 19 pandemic, have had a significant impact on many businesses, many of which have seen their sales slashed, cash reserves decimated, trading impeded by staff shortages and escalating debt.
​
Surviving these impacts will require a priority focus upon cash flow combined with restoration of sustainable profitability, all required in an environment of continuing complexity and uncertainty.
​
The issues you will confront and our suggestions on how you can move your business forward as we move out of COVID restrictions are discussed below.
The difference this time is uncertainty
Perhaps the greatest difficulty you will face going forward will be a significantly greater level of uncertainty than has existed in the past. The seismic shift in the responses of governments arising from the evolution of the Omicron variant demonstrate difficulty for businesses in preparing for the COVID future. There is no certainty that the coronavirus will not mutate and surge again in yet another variant, resulting in fresh government-imposed constraints on trading. There will also be permanent changes in some consumer and employee behaviours that may impact upon your business. Even when COVID measures come to an end government regulations may impose additional costs and risks upon your business.
Overlaying the direct COVID issues will be broader macroeconomic concerns driven by massive debt-funded government COVID stimulus packages, asset bubbles, and inflation. The future economic impacts of these factors are unknown but, whatever they are, they are likely to be felt unevenly across the world resulting in some level of macroeconomic volatility. The world is in uncharted economic territory and this simply heightens the uncertainties of doing business in the future.
​
The prospect of rising interest rates also presents a risk for businesses, particularly the many businesses that will emerge from the shadow of COVID with large debts and weak balance sheets.
Greater levels of uncertainty will be a fact of life until sometime well after COVID reverts to being an endemic and world economies return to some level of normality.
Macroeconomic uncertainties
The macroeconomic uncertainties, risks and threats facing your business in the future will be beyond your control. That does not mean that you cannot, or should not, plan your future strategies or forecast the future performance of your business. It is critical that you develop a plan for survival that will include financial forecasts.
The uncertainties of the foreseeable future dictate that there will be a range of potential outcomes for your business depending on how these factors play out. Uncertainty will dictate that you will be making assumptions based on imperfect information and your assumptions that may ultimately prove to be incorrect. To accommodate this future variability, your forecasts will need to be prepared based on a range of best, likely and worst-case assumptions. The accuracy of these forecasts will be determined by the quality of the assumptions that are used. It will be essential that you critically assess and evaluate the assumptions used in forecasting and regularly update and adapt them as circumstances unfold, to achieve the highest level of comfort possible in an uncertain world. You will need to exercise judgement based on your experience, your knowledge of your business and its customers, and your assessment of potential future events, in determining the most appropriate strategy for your business. The risk of error is increased as a result of the imperfections and uncertainties of your assumptions. Nevertheless, basing your decisions on imperfect information is far better than burying your head in the sand and hoping things will turn out alright.
Cash – the short-term imperative
In the short-term the survival of your business will be determined by how well you manage cash flow. Cash is the immediately critical element because it is essential to purchase production inputs, buy stock, pay wages, rent and the other expenses of the business. Cash is a finite resource that fluctuates on a daily basis in every business. The combination of the cash resources of your business and the rate at which that cash is dissipated and replenished will be the critical determinants of the capacity of your business to continue to trade in the short term.
​
In many cases, the accumulation of debts and deferred obligations to banks, landlords, tax authorities and other creditors means that your business may be coming out of the COVID with financial commitments exceeding incoming cash flow. You will be starting behind the cash flow eight ball, and this may remain the case even when trading reverts back to normal because trading cash flow will need to accommodate not only normal cash expenses but also the cost of servicing these historical liabilities.
​
Your cash flow forecast (you should prepare have a cash flow forecast at least 3 months ahead) needs to include these cash obligations. Where it becomes evident that cash generation from trading will be inadequate to meet current expenses and the obligations relating to the built up COVID debts, the payment arrangements for these historical liabilities need to be renegotiated. Resist the temptation to inflate your forecasts to cover these additional cash costs or to avoid these tough conversations. It is much better to be up-front and honest with creditors and seek a sustainable cash position rather than just hoping for the best.
Where your forecasts demonstrate a serious problem in meeting future cash commitments due to the burden of historical liabilities seek expert advice around restructuring or recapitalisation options, and do so sooner rather than later.
Profitability – the ongoing key to survival
While cash flow is the immediate imperative for your business, profitability will, in the medium and long term, be the determinant of business survival. Profitable trading is the sustainable source of cash flow regeneration for any business.
As vaccines are distributed and restrictions are eased, many businesses impacted by COVID are seeing some move back towards pre-COVID trading, although this trading is, in many cases, being disrupted again by the impacts of supply chain issues and staffing issues driven by the Omicron variant. Some commentators are predicting an early return to ‘normal’ trading levels. Every business manager must make their own call on the timing of a return to sustainable profitability but be aware of the risks when forecasting trading outcomes. For some businesses a surge in post-COVID sales is a reflection of pent-up demand that may not be sustained. For others, strong sales may be driven by the temporary lack of alternative spending options for consumers as well as unprecedented government stimulus.
​
You should consider these variables when forecasting future profitability. Remember also, that your competitors will be suffering similar impacts and this might lead to increased competitive pressures. On the other hand your competitors may be weakened as a result of COVID and this may present opportunities to you. You should seek to build as much flexibility as you can into your overhead structure as you rebuild or reinstate capacity.
​
Be aware of, and vigilant in monitoring, emerging risks of inflation and interest rate rises. Also be aware of, and prepared to respond to, supply chain risks, staff shortages (and staff wage demands driven by staff shortages) and the risks associated with any re-emergence of COVID lockdowns or trading constraints.
​
As with cash flow, where your forecasts demonstrate a lack of sustainable profitability seek expert advice around restructuring or recapitalisation options, and do so at the earliest opportunity.
​
If your business is in distress you may benefit from my book, ‘Survive in Business – How to Turn Your Struggling Business Around’, which can be purchased by following the link in the ‘Publications' page of this website.
If you have any comments or questions please email us via the Contact link on the website