By: Waqas Ahmed, Principal Director, Financial Advisory and Ali Taher, Assistant Director, Financial Advisory, Deloitte Middle East
Economic impact and outlook of Covid-19
Whilst the health impacts of COVID-19 are becoming somewhat clearer, the economic impact of the global lockdown measures implemented is still very obscure.
There are opposing views on the potential timeframe of an economic recovery. Some are predicting a “v-shaped recovery”, indicating that the global economy was healthy before the crisis, and hence the short term disruption should be followed by an equally quick recovery. Other predictions are less optimistic, indicating that the demand shock, and ensuing supply contraction will cause a longer term economic recession.
In reality the current situation is unprecedented and difficult to predict. There are significant variables at play, from how the disease will continue to evolve, to how federal governments respond in terms of easing the lockdown measures, to the quantum and approach for economic stimulus packages.
What should business leaders do?
In the face of uncertainty, there are essentially two options available to people:
- Wait and see how the current situation unfolds before developing a response plan
- Demonstrate resilience and agility, and proactively plan
Given the pervasive impact of this pandemic, inaction is the most damaging option. Business Leaders have a responsibility to assess the impact of this crisis on their businesses, and proactively plan for appropriate responses to protect stakeholder value.
Practical and immediate actions which could be considered
- Board of Directors (BOD) increase their involvement and meet (much) more frequently
- BoD appoint a Crisis Management team to steer and closely monitor the business during this time, which may include the CEO, CFO, COO (or equivalents) + other key business leaders
- The Crisis Management team should be tasked with:
- Updating current business plans and stress testing the plans for various scenarios
- Developing short term cash flow forecasting tools to monitor cash on a daily basis
- Cash control and reducing any discretionary spend. Amend the Delegation of Authority to appoint a Cash Tsar (likely CFO) to control this
- Assessing any potential captive market opportunities due to COVID-19 e.g. strategic and opportunistic M&A, positioning the business to take advantage quickly of any recovery
Importance of scenario planning
If there were ever a time for scenario planning, it is now. As a start, update the Base Case Business Plans, because they are no longer relevant, and keep it dynamic regularly amended to reflect latest market situation and business positioning. Focus on key business value drivers and stress test for the worst possible outcomes:
- What happens if we lose our biggest customer?
- What happens if revenue drops by 60% for the next two years?
- What happens if our collection cycle increases from 90 to 300 days?
- What happens if our strategic supplier goes bankrupt? Any supply chain is only as strong as its weakest link.
The list goes on…
Assess the impact of the above on cash flows, and the business’ ability to survive from a liquidity perspective. Accounting profits are not what matters in a crisis scenario.
Potential short term measures to preserve cash
To reiterate – the short term focus (for the next 6 months) should be cash liquidity. Based on the different scenarios, there are different potential mitigating actions available to survive (which depend on the severity of the problem):
- Reducing non-business critical discretionary spend
- Postponing capex plans
- Negotiating payment terms with customers and suppliers. In essence, exchange better payment terms for worse margins (in the short term)
- Prioritizing payments to key and strategic suppliers
- Drawing on additional unutilized credit facilities
- Employee cost reductions – temporary pay cuts, unpaid leave
- Discussions with lenders to postpone upcoming debt repayments
Importance of stakeholder management
Stakeholder management is absolutely critical in implementing the above measures. Clear communication with creditors, customers and employees is required to articulate the issues faced and the mitigating actions, to demonstrate that the business is driving solutions, not taking a back seat to problems.
Longer term strategic shifts
In the longer term, Business Leaders should also be thinking about the long term strategic “pivots” which may be required. This may be a good opportunity to self-reflect, get lean, and think about the road ahead.
- Are there any BUs which should be down-sized?
- Is the business overly exposed to a particular product / geography / customer?
- Are consumer behaviors changing? How should this be addressed?
- Is the supply chain diversified?
- Is the cost structure sufficiently agile?
A lasting thought
As a lasting thought – in the months and possibly years ahead, Business Leaders may not necessarily be blamed for poor financial results. This crisis is unprecedented and unexpected.
Business Leaders will however will be blamed for a lack of appropriate and swift response.
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