16/04/2020 As the Covid-19 crisis continues, it’s becoming increasingly clear that the challenges for privately owned business are going to last longer, and cut deeper, than anyone anticipated.
The initial hope was that businesses were facing a short-term challenge, and that after a short, sharp shock lasting a month or two, things would start settling back to normal. But that is now looking highly unlikely.
Instead, the economy is facing a medium-term challenge that means businesses will need to manage every aspect of their operations over several months, even years, in a way they have never needed to manage them before.
By understanding the broader context of the pandemic on demand and supply over the next 12 months, however, businesses can make sure they are in the best possible position to survive and resume operations as the situation returns to normal - albeit a ‘new normal’.
Understand the situation
The best place to start is recognising the different phases of the crisis and the potential duration of each phase in terms of its impact on demand and supply.
There are four key phases to consider:
- Lead-in phase. This is when the first infections and deaths occurred.
- Acute phase. When peak infection and mortality rates occur and economic ‘lockdown’ is in place, lasting 10-12 weeks.
- Suppression phase. This will be when continued but lesser restrictions are in place to suppress the virus, which could last for up to a year.
- Recovery phase. The longer term impact of the crisis could last two to three years as its impact works its way through the major economies of the world.
During the lead-in phase, priorities were focusing on caring for staff, customers and other stakeholders from a public health perspective; and to assess the short-term cashflow implications of the sudden drop in demand.
As we now progress through the acute phase, the challenge is to get as lean as possible, while remaining agile enough to slowly build through the suppression phase to the recovery phase.
Privately owned businesses only have limited reserves. Those reserves need to last as long as possible so that businesses can survive until the recovery kicks in.
As we know, the recovery phase is going to take a lot longer than initially expected, so businesses need to plan how they can build agility and flexibility to gradually ramp up their operations over six months to a year.
To do so will require an unprecedented level of vigilance, planning and flexibility, with businesses developing comprehensive strategies to deal with a range of different scenarios – best case, likely case and worst case . Then revising and updating those strategies on a potentially monthly basis as more information becomes available as circumstances become clearer. The actions required to maintain this position over several months, rather than weeks, are likely to be drastic. It may mean completely shutting down sites, letting go of staff rather than furloughing them, and disposing of assets.
An important component of successfully responding to the crisis is to create a cross functional management team tasked with the singular focus on surviving this period. The team must have the authority to act at the speed necessary to respond to the ever changing crisis environment and the mindset, analysis and planning skillsets required to make the rights calls at the right time.
Five key pillars to help with what’s next
At Mazars, our approach to guiding our clients through these challenges is based on five pillars underpinning our business and financial sustainability programme:
- A clear pre-crisis financial starting point. Conduct a fair and honest assessment of your pre-crisis financial track record in terms of revenue, cost base profile, profit, cashflow and balance sheet strength. A realistic starting point is the foundation for the entire crisis planning project.
- Pandemic revenue impact assessment. Assess the likely duration of each pandemic phase and its associated revenue impact on your business, including metrics such as sales volume decline, supply problems and staffing availability. What do you expect the impact to be on supply and demand, and what affect will it have on sales, gross margin, profit, cashflow and working capital during the different phases of the crisis? This scenario analysis will help to identify the range of forecasted reduction in revenue vs. current operating models, budgets and cost base. In addition, all businesses will need to investigate the national funding support that may be available to help bridge that gap.
- Clarify crisis management priorities. Set clear priorities for your business to help orient the response. For example, it could be a priority to reduce costs to the minimum required to generate sales and meet customer demand – however, this will need to be balanced against the resources necessary to protect the competitive edge of the business in the future. Working on innovating the business model to better compete in the current environment and be prepared for the recovery phase may also be a necessary priority. So, agreeing the aims, objectives and priorities to guide a revised operational and business plan for each phase of this crisis period is an important factor in guiding the business.
- Build an integrated 18-month crisis management plan. Identify a realistic suite of tactics and actions to deliver on these priorities and develop new operational and financial plans to support their delivery. This could include developing revised operational plans and new management models for decreasing revenue levels, strategic cost reduction actions, re-negotiation of contractual commitments, working capital management and new external funding plans. These plans should be built around the most likely scenario, yet also identify additional contingency measures that may needed in a worst-case scenario, and ramp-up measures that can be deployed in a best case scenario.
- Execute plans and continuously monitor operational performance. Closely track your operational performance compared to the plan on a monthly basis, reviewing revenue, profit, working capital, funding and cashflow position and ensuring that key actions identified are being executed – all the while maintaining relationships and communicating with key stakeholders. This pillar also requires the ongoing scanning of the environment for key changes to ensure the continued relevance of planning assumptions and considering whether changes need to be made. At all times ensure the operational plans and cost base remain consistent with the changing needs of the business.
Adopting this approach will provide the management team with a crisis management framework and dashboard to continually assess the scale of the crisis using a number of simple scenarios. This will allow ongoing performance to be clearly tracked and necessary tactics implemented in order to deal with the specific challenges of each stage of the crisis, from now until the new normal returns.
There is a growing sense that businesses are in this together. While the decisions that need to be made now are tough, we believe they are critical for a business to ensure survival and a prosperous future in the longer term. At Mazars, we’re proud to support clients through this period of uncertainty. To speak to one of our experts about how we can help your business during the crisis, please contact us to the right.
To find out more about the Business and Financial Sustainability Programme, please download the file below.