COVID-19: business recovery planning for private businesses

2020-04-26 - 05:29

Article written by: Ryan Burke - EY Global Growth Markets Leader

 

As businesses navigate the ongoing COVID-19 crisis, now is the time to focus on five key priorities that can help reshape results.

The World Health Organization (WHO) declared COVID-19 a public health emergency of international scale. COVID-19 has become a human tragedy, and is impacting governments and businesses alike with unprecedented disruption and risks. It is a crisis that has profound implications for companies globally. From the complete or partial shutdown of factories, to supply chain disruptions, to labor shortages to cash flow stress, companies are feeling the business and financial shock of the COVID-19 outbreak.

As companies navigate the ongoing COVID-19 crisis, there are a number of key issues business leaders should be thinking about, as well as steps they can take to reshape their business and plan for recovery.

Five ways to respond to the COVID-19 impact

1. Prioritize people safety and continuous engagement

Ensuring the safety and well-being of the employees in the workplace is essential. People are looking to their employer, community and government leaders for guidance. Addressing their concerns in an open and transparent manner will go a long way to engaging them and reassuring the business continuity.

2. Reshape strategy for business continuity

Most businesses are likely to experience significant disruption to their business-as-usual operations and will face business underperformance throughout the duration of the COVID-19 crisis. To help address these challenges, companies will want to:

• Evaluate short-term liquidity - Companies will want to instil short-term cash flow monitoring discipline that allows them to predict cash flow pressures and intervene in a timely manner. They’ll also want to maintain strict discipline on working capital, particularly around collecting receivables and managing inventory build-up. Additionally, it’s important to be creative and proactively intervene to lighten the working capital cycle.
• Assess financial and operational risks and respond quickly - Companies will need to monitor direct cost escalations and their impact on overall product margins, intervening and renegotiating, where necessary. They also will need to monitor the pressures that may be impacting some of their customers, suppliers, contractors or alliance partners. Finally, be aware of covenant breaches with banking facilities and other financial institutions relating to impairment risks in asset values, which may impact the health of the overall balance sheet.
• Consider debt modifications and loan covenants - Companies may experience cash flow challenges because of disruptions in their operations, higher operating costs or lost revenues. They may need to obtain additional financing, amend the terms of existing debt agreements or obtain waivers if they no longer satisfy debt covenants.
• Consider alternative supply chain options - Companies that source parts or materials from suppliers in areas significantly impacted by COVID-19 will want to look for alternatives.
• Determine how the COVID-19 crisis affects budgets and business plans - Companies will want to stress-test financial plans for multiple scenarios and increase the frequency of budget reviews to understand the potential impact on financial performance and assess how long the impact may continue.

3. Communicate with relevant stakeholders

Clear, transparent and timely communications are necessary when creating a platform to reshape the business and to secure ongoing support from customers, employees, suppliers, creditors, investors and regulatory authorities.

• Customers - Companies will want to keep customers updated with any impacts to product or service delivery. If contractual obligations cannot be met as a result of supplier or production disruption, it is important to maintain open lines of communication to revisit timelines or invoke “force majeure” or “act of God” clauses. Such proactive action will help to mitigate punitive damages or liabilities associated with disrupted customer obligations.
• Employees - For employees, communications plans should try to find the balance between caution and maintaining a business-as-usual mindset.
• Suppliers - Companies need to maintain regular contact with suppliers regarding their capability to deliver goods and services during the COVID-19 crisis and their recovery plans, so that the company can consider alternative supply chain options in a timely manner.
• Creditors and investors - Companies will want to review terms and conditions on loan contracts to identify sensitive debts and avoid vital technical debt breaches. These reviews will have the added benefit of giving companies a chance to proactively manage the dialogue and communications with creditors regarding any necessary amendments to existing terms or refinancing arrangements.
• Government and regulators - When communicating with relevant stakeholders, companies will want to consult with their legal teams for advice on potential liabilities and with their business units regarding how to manage communications around ongoing breaches and collection of proof, if any.

4. Maximize the use of government support for businesses, where available

Administrations around the world are rapidly developing new measures to address the economic challenges faced by industries, companies and employees.

Many countries have already introduced fiscal and/or monetary measures intended to ease the challenges created by COVID-19.

As new measures are developed, companies should work to track regulatory and legislative changes, analyze how the policies apply to their businesses, share economic concerns and policy proposals with your regulators and legislators, and communicate available new benefits to employees.

5. Build resilience in preparation for the new normal

Once companies have solidified strategies and communicated any new directions with relevant stakeholders, they will need to execute based on revised plans while monitoring what continues to be a fluid situation. Senior management should report any material deviation from the plan in a timely manner so that their companies can take additional action to avoid further negative impact.

Once the COVID-19 outbreak is controlled, companies will want to review and renew business continuity plans (BCPs). They’ll want to assess how existing BCPs are working. If there are deficiencies, companies will want to identify root causes, whether they involve timeliness of action, lack of infrastructure, labor shortages, or external environment issues. Companies will then want to consider putting new internal guidelines in place based on lessons learned, as well as solid contingency plans to build resilience and better respond to future crises.

Plan for recovery now, not later

Although there are lessons to learn after the fact, companies should be making decisions during the crisis with recovery in mind.

The COVID-19 crisis is impossible to predict with conventional wisdom and forecasting tools. However, there are many lessons companies can learn and carry forward once the crisis has passed, and they’ve had a chance to analyze their response.

When the crisis is over, it will be clear which companies have the resilience and agility to reshape their business strategy to thrive in the future.

Longer term, companies will need to consider how robust their business, management team and initiatives were in facing the crisis. It will also be important to consider and reset the business assumptions that underpin the supply chain and other concentrations that many businesses have been exposed to over time.