What is the impact of the Covid-19 pandemic?
- Global, rapid and intense
- Crisis akin to a Third World War
- Cash frozen, wealth and employment have vaporized in few weeks
- Years of bull market gains [upwards of US$10 trillion] wiped out in few weeks
- Startups funding and M&A activities have come to standstill. Will take a while to resume
- Companies and individuals are going to hold cash – Sign for major liquidity crunch
- Banking will see more NPAs [Incl. retail] in coming years – May harden banks to lend further
- Distress signal for airlines, tourism, event management, logistics, restaurants, entertainment industries
Also read: COVID 19 – Smart survival for self and business
What are immediate risks for you?
- Cash inflow taps frozen – collections, new revenue
- Obligations clock is NOT frozen – interest, employees etc.
- Fixed Costs……
- Payment to suppliers, liquidated damage issues, force majeure issues.
- Additional liquidity may be tough to find
What to do?
- Identify key members to make a “war-room” team to evaluate daily situation and plan ahead
- Model your risks. Make multiple P&L + Cashflow scenario. Plan for the worst
- There could be opportunities as well – we learn that Alcohol manufacturers are now making Sanitizers, Engineering Companies can make Ventilators, moulding companies can make hospital beds
- Plan for short-term and mid-term.
- Current consensus on short term is till end of June
- Long term impact will be more permanent than 9/11 – no one has a clue now. Survival (liquidity) is the only goal everything else can wait
Also read: Business continuity plan amidst COVID-19: Immediate action points
1. Conserve Cash – for Survival & Revival
- Offer cash discounts to customers for faster collection
- Freeze all your discretionary expenses
- Thorough review of marketing strategy & expenditure
- Make scenario analysis for manpower & salary – discuss pay cut/ deferment
- Hold back incentives, bonus & increments
- Postpone major expansion plans & Capex
- Discuss reduction or deferment from key vendors
- Talk to your landlord for relief in rent – best time to negotiate
- Hold enough cash to kickstart working capital cycle
2. Debt, Insurance & Government Obligations
- Consider holding back your government obligations as their cost is below CC cost
- Talk to banks for postponement of principal repayment – RBI Action is not automatic – you need to write to your bank
- Insurance Premiums provide for grace period of 30 days – but better not to avail
- Push ESIC to pay salaries for covered workers – as if they are impacted by sickness
- Explore new debt options – bill discounting etc
- Keep a headroom for collateral ready – There might be sudden demand for cash
3. Force Majeure
- Government has clarified that this incident qualifies as a Force Majeure event
- Even if Force Majeure is not in your contract, you could still invoke “Doctrine of Frustration” under section 56 for impossibility of performance
- But there are many technicalities – Get in touch with your lawyer and be prepared
4. Remodel your business
Prepare multiple P&L & Cashflow scenarios to understand risk & be ready for potential tough decisions
- Impact – short term revenue ZERO & minor operational challenges
- Action - Talk to your customers, ensure smooth supply chain & work on cost optimization
- Impact – Revenue slow-down for months to come, shutting down of few BUs or products
- Action – Look for alternate avenues, temporary close operations & cost reduction is the key
Worst case scenario
- Impact – Drastic drop in revenue & greater risk of negative cash
- Action – Shutdown High Fixed Cost cost centres, plan for lean management,
5. Use time to enhance you to next version
- Leaders will have to maintain healthy state of mind – keep calm
- Develop a new hobby or learn a new skill
- You can NOT say that you do not have the time
- Use online resources to stay healthy
- Sleep well
- Reconfigure your Supply Chain
- Prepare a rapid re-launch plan
- Wake up call to go DIGITAL – has to be part of relaunch strategy
- Resources are available cheap – make use of them
7. Post COVID-19… some thoughts
- Quite possible that the end to this virus is rapid
- Hence, always be ready to hit the ground running
- Western world will behave very differently to Eastern World
- Recovery will be V shaped for India
- Aggregate demand will revive for consumer-focused industries first and will graduate upwards
- Pharma, Digital Media, Fintech, Healthcare, Consumer staples will bounce back faster
- Oil & Gas industry will be sluggish – there is now added trouble of fight for market share between producers
How can we help you?
Free access to our panel of CFOs to understand best current practices & bounce your ideas
- Engage us as your trusted partner
We will help you get your financial task plan up and running with multiple case scenario
Also read: An unprecedented challenge, also an opportunity for SMEs to do unprecedented things
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Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views, official policy or position of GlobalLinker.
Abheek is a Chartered Accountant and has experience of over 20 years across industries in India.. Adept in Manufacturing and Services space; he has a diverse experience of working...