The coronavirus or COVID-19 presents a significant threat not only to human health but also to business. For many businesses, moves by governments to contain the public health risk result in a sudden fall in demand for your products or services, labour shortages and supply disruptions.
Your operations will be impacted by supply disruptions as your suppliers deal with the same issues.
In short, COVID-19 will be a shock to many businesses that could place their immediate future in serious jeopardy, and there is no way of knowing how long this pending crisis will last.
A range of actions you should consider taking now to prepare your business for COVID-19, to place it in the best possible position to not only navigate through the crisis but to also be better prepared to take advantage of the recovery.
To be able to make the best possible decisions in a difficult environment, you need access to the most up-to-date information on the state of your business finances. Therefore, we recommend you bring your financial statements up to date and keep them up to date.
Discuss with your staff, key suppliers and key customers what the likely impact of COVID-19 will be on your business. The impacts on a business will be most significant in the following area:
- Sales – particularly if you have little to no online presence.
- Staff availability – with people likely to be subject to restrictions on their movement, their ability to work will be curtailed, particularly if there is limited scope for them to work from home.
- Supply chain – particularly if you rely on suppliers from badly impacted parts of the world.
- Finance – particularly if your cash reserves are low.
If your business is already impacted, start by listing what those impacts are. If you are not impacted yet, you should still be able to make some informed projections. In listing those possible impacts, attempt to quantify what those impacts will have on your business and identify possible strategies to mitigate those impacts.
Knowledge of the financial health of your business is fundamental to assisting you decide what you can and should do to place your business in the best possible position to navigate through the crisis.
A significant amount of information on the financial health and performance of your business can be gained by analysing your financial statements through financial ratios.
The assumptions you may have used to produce your budget are most likely no longer relevant because of the crisis. Working with your accountant, take the list of possible impacts of COVID-19 you have developed and re-do your budgets. Include a range of possible previously unthinkable scenarios, such as a 50 to 80 per cent decline in sales over three to six months, or a supplier being unable to supply you a key item for six weeks.
Carefully consider how each of those scenarios impacts your cash flow.
After re-doing your budgets and determining the financial health of your business, including your cash reserves, you are likely to find your business will struggle with cash flow in the near future. You must therefore act now to improve cash flows.
The first step to improving cash flow is to prepare a cash flow forecast, and updating that forecast throughout the crisis, possibly weekly. This will give you forewarning of any cash flow problems so you can act early to address them.
Consider the following tips to improve your cash flow. Some of them we would not recommend in a normal situation, however you may soon be operating in an environment you have never experienced:
- Take steps to increase sales, especially of stock that may not last three to six months.
- Focus your promotions towards these stock items.
- Reduce stock orders, particularly stock you assume will be in low demand during the crisis.
- Increase purchases of stock you think will be in high demand during the crisis.
- Promote the selling of excess, slow moving and/or obsolete stock.
- Contact your debtors and ask them to pay you, even if before the due date.
- If your debtors are experiencing cash flow difficulties themselves, negotiate periodic payments and make sure they stick to their side of the deal.
- Invoice as soon as the product or service is delivered … don’t delay.
- Produce aged debtor reports and follow up with aged debtors.
- Reduce debtors by encouraging customers to pay at the point of purchase or to pay early.
- Only pay commission to sales staff when payment is received on their sales.
- Review your sales contracts to determine under what circumstances customers can cancel orders. If necessary, update those contracts to limit the ability of customers to cancel orders.
- Seek payment extensions, even temporarily to your credit terms with suppliers.
- Check your supply contracts to determine under what circumstances you can cancel orders if necessary, or at least delay delivery.
- Negotiate instalment plans with the tax authorities.
- Cut spending you believe unnecessary in a crisis, such as advertising.
- Delay unnecessary capital expenditure.
- Look to reduce staff costs by reviewing staffing arrangements. This could include reducing employee or contractor numbers, reduced working hours or implementing a recruitment freeze. You may need to seek advice as to how to do this.
- Reduce your drawings from the business.
Seek finance to fill cash shortfalls
- Speak to your lender about introducing or increasing your overdraft facility. Demonstrate that you are on top of your business and understand your cash flow.
- Determine your own personal cash position to see if you can inject cash into your business.
- Seek out other investors to see if they can inject cash into the business.
Change your business model
- Increase your investment in selling online. If you are not selling online, you must consider doing so.
- Look at different ways to deliver your product or service to your customers.
- Sell or lease out assets you don’t need.
Some of these actions may be detrimental to your business in the recovery stage. Keep an eye open for changes in the environment so that you can return to normal business operations quickly.
Recent experience from markets already impacted by the virus shows that customers are likely to stay home (whether at the instructions of health authorities or by choice), and therefore, purchase more online. To remain viable, many small businesses will need to begin selling online or increase how much they sell online.
A key part to preparing for the crisis is investigating different online platforms to see which one is best to sell your products to reduce your reliance on your shop front. You should also review how best to deliver your products to the customer. Your accountant may be able to assist you with these important considerations.
Suppliers of services should investigate digital solutions to the delivery of services to reduce the need for face to face contact. Consequently, you may choose to close some of your physical locations.
Talk to your key suppliers about their ability to delivery reliably during the crisis. Consider not only their ability to produce the inputs you need, but also the transportation of the products to you and keep to the agreed costs/prices. For example, if your supplier (or their key suppliers) are based in a location hard hit by COVID-19, production may slow or stopped, and/or their ability to get those supplies to you is restricted. Consequently, those key supplies take longer to arrive. If authorities impose import restrictions based on the product origins, then more time will be spent at customs clearance points before you are able to utilize the goods.
In such a scenario, you should consider setting up alternative suppliers, including local suppliers even if more expensive. Source them now and start price negotiations early.
Consider which of your employees are not easily replaced as well as which business functions need to keep operating regardless. Look for others who can learn the task. Outsourcing may be an alternative solution.
Where such employees can work from home, make sure they take the equipment (such as a laptop) they need to work from home, with them every night in case you have to close your premises at short notice.
Consider developing a special roster so that critical staff are always available to keep essential business systems and processes running.
There are a number of key indicators which will quickly tell you how your business is tracking. They could be as simple as the value of daily sales, or the cash balance or the debtors’ balance, or the value of orders and bookings.
Create a graph showing these key indicators and update it daily or at least weekly. It will quickly show you any trends as they emerge.
Use the crisis as an opportunity to reflect on your business, how it was being run, how you would like it to run post crisis and whether it is still right for you. Questions to ask yourself include:
- Were you happy running your business before the crisis?
- Were you making the profit you wanted?
- Do you like being your own boss?
- Was there adequate cashflow in the business prior to the crisis?
- Are you achieving the return on investment you want from your business?
- Are you prepared for the potential extra demands that recovering your business will place on you, both personally and financially?
- Can you afford to continue to run the business while your business is recovering?
Can you foresee any possible emerging opportunities for your business following the crisis?
During the crisis, regularly ask:
- is your business able to pay your creditors, your tax obligations, employment obligations and make loan repayments as they become due?
- Do you have adequate financial reserves to cover debts due and payable in the next few months?
If you answer no to these questions, you should immediately seek professional advice