17 Apr Navigating an economic crisis

Posted at 09:38h in Corporate and Specialised Finance by

There is no denying it. The COVID-19 pandemic has catalysed a worldwide economic crisis of epic proportions. None of us have ever seen anything like this before. If you’re an employee, you’re very worried. If you’re a business owner, you’re scrambling. You’re trying to figure out what your next step should be. You’re more concerned about the survival of your business than you are about the many philosophical discussions around what the world will look like when we return to ‘normality’. This is crunch-time and you need real solutions urgently. 

Right now, in this environment of deep uncertainty, companies need to prioritise speed over efficiency. Quick and decisive action is a necessity. You literally cannot afford to wait to see what happens. Now is the time to make cash inflow projections on a daily or weekly basis and match them to a list of prioritised cash outflows, updating both in real time. This will allow you to narrow your focus and filter what’s critically important from all the noise out there.

With the fast-changing pace of the pandemic and the announcement by the President of a nationwide lock-down, by applying a 4-month window of survival the following key decisions should be considered by all businesses, particularly those that are worst affected. These key decisions should have been sufficiently addressed within the last 2 weeks.

Operational decisions

  1. All businesses to fully comply with the announcement by the President.
  2. Consider the need to remain open in order to assist customers that provide essential services.
  3. Establishment of a crisis management team, with daily meetings and decision-making.
  4. All staff to work from home where possible.
  5. All safety protocols to be applied and enforced.

Financial decisions

  1. Cost curtailment of significant proportions.
  2. Only essential and critical creditor payments to be made.
  3. Significant focus on accounts receivable collections.
  4. Scenario planning on both cash and longevity.

Human capital decisions

  1. Advanced communication with all staff on a daily basis.
  2. Need for unpaid leave, forced leave and salary sacrifice.
  3. Retrenchment options – this is a last resort.

Given the impact of South Africa’s lock-down and the fact that the likely impact of the pandemic is expected to be far reaching and prolonged, companies need to model their 4-month liquidity positions based on mild, moderate and severe scenarios.

At times like these businesses need to proactively connect with their funders, such as banks, to provide updates and to also seek their support.

If a company has a leveraged balance sheet to support its growth, our recommendation would be to involve the bankers in question as much as possible.

Issues to discuss with your banker:

  1. Ongoing weekly calls to track progress and monitor changes in order to provide flexible and effective decision-making.
  2. Given the likely liquidity squeeze, consider asking for the following:
    • A full covenant reprieve for an initial period of 6 months. Given the potential long tail to such a pandemic, there may be a need to increase this timeline to 12 months.
    • An interest holiday for the profiled 4 months to enable your business to continue to look after staff and to be able it to survive as a going concern post the COVID-19 pandemic;
    • Further liquidity/funding, should the pandemic continue beyond the 4-month scenario as drafted.
  3. Once there is more certainty regarding the easing of the lock-down you should consider, at the appropriate time, restructuring your business’s debt package altogether.

Critical focus areas 
To be clear, the world will not simply return to a state of ‘business as usual’ immediately after worldwide lock-downs are lifted. We are going to experience a very difficult business environment for many months to come. The International Monetary Fund (“IMF”) says that as a result of the pandemic, the global economy is projected to contract sharply by 3% in 2020, much worse than during the 2008–09 financial crisis. This couldn’t come at a worse time for South Africa – the IMF projects our economy to shrink by 5.8% in 2020. Businesses need to get comfortable with the fact that this is a long-term problem that requires long-term solutionist thinking to ensure survival now and viability going forward.

According to Greg Fisher, Larry and Barbara Sharpf Professor of Entrepreneurship at Indiana University’s Kelley School of Business, there are eight critical areas that business owners should focus on in order to survive the fallout of the COVID-19 pandemic. 

  1. Cash management
  • What is my current cash balance?
  • How long will it last?
  • What can I do to generate cash inflows in the next four months?
  • What can I do to limit cash outflow in the next four months?

 

  1. Customer needs
  • Which customers need my product or service under COVID-19 conditions?
  • What needs do my customers have that I could fulfil?
  • How have my customers’ needs changed?

 

  1.   Core competencies
  • What am I/are we really good at?
  • How can I/we leverage our unique skills and resources to create and deliver an updated value proposition in the context of COVID-19?

 

  1. Changing channels
  • Which channels for reaching customers are open to me now?
  • Are there channels we have not yet thought of?
  • How can I deliver value through an online channel?

 

  1.   Collaboration, not competition
  •   Who could I work with to create and deliver value under these conditions?
  •   Which of my competitors might be a viable partner?
  •   What do I need? Who has that?
  •   How might we work together?

 

  1.   Cutbacks
  •   What could I decide not to do in the interest of saving costs/cash?
  •   Are there activities I could cutback in a humane/ethical way?

 

  1.   Community help
  •   Who needs my help in the community?
  •   How might I collaborate with others in my community to generate and deliver value?
  •   Who in the community might be willing to help me?

 

  1.   Communication
  •   What can I do to keep all stakeholders informed?
  •   Do my customers know what my offerings, goals and needs are?
  •   Do my employees know what my plan of action is?
  •   Do my investors know where I stand, what I need?
  •   Am I leveraging all communication channels effectively?

Companies are now faced with managing their strategic inflection point, that point when a company must respond to severe disruption or face fast deterioration. It is a decisive moment which marks the start of significant change. For many, that moment is now. 

Michael Hodgson 
T: + 27 21 929 4885 
M: + 27 823556377 
E: mhodgson@mettle.net 
mettle.net