The World Health Organization (WHO) declared COVID-19 a public health emergency of international scale. COVID-19 is a situation unlike one we have experienced in modern times. It is a situation marked by both human tragedy and monumental impacts on governments and businesses alike with unprecedented disruption and risks.
It is a crisis with profound implications for companies domestically and globally. Between complete or partial shutdown of factories, supply chain disruptions, labor shortages and/or cash flow stress, companies are feeling the business and financial ramifications of the COVID-19 outbreak.
As companies navigate the ongoing COVID-19 crisis, corporate leaders should consider a number of key issues, as well as the viable steps necessary to reshape your business and plan for recovery.
Top 5 Considerations to Mitigate the COVID-19 Impact
Companies of all sizes require predictive and proactive decision-making to maintain continuity and build resilience.
As companies continue to grapple with the ongoing and evolving situation, we have identified some of the top priorities for your consideration:
1. Prioritize safety and engagement
First and foremost, it is essential to ensure the safety and wellbeing of your employees. Often people turn to their employer, community and government leaders for guidance. By addressing concerns in an open and transparent manner, you can encourage engagement while concurrently providing reassurance about business continuity.
Most critically, you must implement or expand flexible work arrangements and other policies that allow people to work remotely and safely. Depending on the sector, you may want to reorganize teams and reallocate resources, as well as institute employee wellbeing programs and policies that support a safe working environment.
Additionally, we encourage regular communications that align with current government and health authorities’ policies to help keep employees engaged as they and the organization navigate through the crisis.
Finding ways to reimagine a business-as-usual environment that minimizes disruptions for the organization requires a fine balance. Where telecommuting or flexible work arrangements are not possible and you must have workers on site or in direct contact with customers, it is important to provide infection protection measures.
Even if you take precautionary steps, there will be businesses that experience workforce disruptions. For example, labor shortages and increased costs due to mobility restrictions will impact businesses.
If you experience unique challenges, seek advice from your local governments for guidance. Many governments, including those in the United States, have introduced assistance programs for sectors such as tourism and travel that are being severely impacted by COVID-19.
2. Adjust your strategy to maintain 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. Companies with ties to China, for example, a retail company that rely on China manufacturing operations, will experience disruption to their supply chain and production commitments.
There will also be inevitable and significant shifts in consumer demands and behavior impacting several industries such as consumer and retail, manufacturing, life sciences and automotive.
To help address these challenges, companies may want to:
Evaluate short-term liquidity. Instill short-term cash flow monitoring discipline that allows your business to predict cash flow pressures and allows you to intervene in a timely manner. Also, you will want to maintain strict discipline on working capital, particularly around collecting receivables and managing inventory build-up.
Additionally, it is important to be creative and proactively interject to lighten the working capital cycle. Throughout the crisis, you should foster regular communication with suppliers to identify any potential risks.
Assess financial and operational risks and respond quickly. Monitor direct cost escalations and their impact on overall product margins, intervening and renegotiating, where necessary. Companies that are slow to react or unable to renegotiate new terms and conditions may be vulnerable to financial stress that could carry long-term implications. Just as you need to monitor your in-house vulnerabilities, you must also assess the pressures that may be impacting your customers, suppliers, contractors or partners.
This approach is particularly critical for industries like automotive and pharmaceuticals, which are highly dependent on third-party suppliers. Finally, make yourself aware of covenant breaches with banking facilities and other financial institutions relating to the impairment risks in asset values. These may impact the health of the overall balance sheet.
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. Some quick moves will create temporary capacity to meet customer obligations. You should consider the initial disruption as well as post-crisis scenarios given the potential for demand spikes.
Determine how the COVID-19 crisis affects budgets and business plans. You should stress-test financial plans for multiple scenarios to understand the potential impact on financial performance and long-term repercussions. If the impact is material and former budget assumptions and business plans are no longer feasible, you should revise them to remain agile.
If your business faces significant ramifications, you will need to consider minimum operating requirements, including key dependencies on workforce, vendors, location and technology. There is also the issue of short-term capital demands for continuous business operations.
Based on the outcome of your assessment, you may need to look at near-term capital raising, debt refinancing or additional credit support from banks or investors, or policy supports from the government. In conjunction with these considerations, you will need to review overall operating costs and consider slowing down or curtailing all non-essential expenses.
3. Foster communication with stakeholders
During this tumultuous time, the need for clear, transparent and timely communications is incredibly serious. Effective communication is key to secure ongoing support from customers, employees, suppliers, creditors, investors and regulatory authorities.
Customers. You must keep customers informed of any impacts to product or service delivery. If you cannot meet contractual obligations 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. Proactive action can help mitigate punitive damages or liabilities associated with disrupted customer obligations.
Employees. For employees, your communications should find a balance between caution and maintaining a business-as-usual mindset.
Suppliers. Maintain regular contact with suppliers regarding their capability to deliver goods and services as well as their recovery plans. Being abreast of their situation allows you to consider alternative supply chain options, as necessary, in a timely manner.
Creditors and investors. Review terms and conditions on loan contracts to identify sensitive debts and avoid vital technical debt breaches. Careful reviews give companies a chance to proactively manage dialogue and communications with creditors regarding any necessary amendments to existing terms or refinancing conditions.
Government and regulators. Consult with your legal and risk management teams, as appropriate, for advice on potential exposures.
4. Optimize your use of government support policies
Must governments, both federally and locally, are looking to provide support. It is important to note that government support may differ based on jurisdiction and sector. Identify and understand each opportunity and determine which ones are best for your organization.
5. Develop resilience in preparation for the new normal
Once you solidify strategies based on stress tests and communicate any new directions with relevant stakeholders, you 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 you can take additional action to avoid further negative effects.
Once the COVID-19 outbreak is controlled, you should review and renew business continuity plans (BCP). If there are deficiencies, identify the origins, whether it is timeliness of action, lack of infrastructure, labor shortages, or external environment issues.
Then consider implementing new internal guidelines, as well as solid contingency plans to build resilience and better respond to future crises.
How Squar Milner can help during the time of crisis?
At Squar Milner, we are a client-first firm. We cannot operate without you and we sincerely want to see your business succeed. We are able to work with you to develop best practices, establish effective tax planning strategies to maximize savings and minimize liabilities, and make sound business decisions.
We will work alongside you throughout this ongoing situation to understand you, your business, your customers and more so that we can create the optimal solutions for you. Contact us today if you have any questions or concerns!
Disclaimer: This material has been prepared for informational purposes only, and is not intended to substitute for obtaining accounting, tax, or financial advice from a professional tax planner or financial planner. All information is provided “as is,” with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information.