Expert analysis from Emer O'Riordan, Partner, Audit & Business Advisory, Mazars, and Lorcan Colclough, Partner, Audit & Business Advisory, Mazars.
As the COVID-19 crisis continues to restrict both the Irish and global economies, it is becoming clear that business performance or worse, survival, will be threatened for many months to come. The economy is facing a medium-term challenge and businesses will need to manage every aspect of their operations with unprecedented vigilance and flexibility.
However, by understanding the broader context of the pandemic on demand and supply over the next 12 months, businesses can make sure they are in the best possible position to survive and resume operations as the situation returns to normal - albeit a ‘new normal’.
The best place to start is recognising the different phases of the crisis and the potential duration of each phase in terms of its impact on demand and supply.
There are four key phases to consider:
1. Lead-in phase. This is when the first infections and deaths occurred.
2. Acute phase. When peak infection and mortality rates occur and economic ‘lockdown’ is in place, lasting at least 10-12 weeks.
3. Suppression phase. This will be when continued but lesser restrictions are in place to suppress the virus, which could last for up to a year.
4. Recovery phase. The longer-term impact of the crisis could last two to three years as its full impact works its way through the major economies of the world. Businesses need to plan for this recovery phase; how they will build agility and flexibility to gradually ramp up operations.
As we enter the suppression phase, we can see businesses slowly reopening their doors to customers and employees under new social distancing restrictions. The duration of this phase is still a best estimate, with the threat of a second wave of the virus ever present. The objective for many is still to protect the core competencies and competitive edge of the business for a recovery phase.
What to focus on
All businesses, particularly those with limited reserves, will need to conduct financial planning with extreme vigilance and flexibility under a range of different scenarios. The strategies required to maintain this position over several months are likely to be drastic. It may mean completely shutting down sites, letting go of staff rather than temporary lay-offs, and disposing of assets.
At Mazars, our approach to guiding our clients through these challenges and support their decision-making process is based on five pillars underpinning our Business and Financial Sustainability Programme:
1. A clear pre-crisis financial starting point. Conduct a fair and honest assessment of your pre-crisis financial track record in terms of revenue, cost base profile, profit, cashflow and balance sheet strength. A realistic starting point is the foundation for the entire crisis planning project.
2. Pandemic impact assessment. Assess the likely duration of each pandemic phase and its associated financial impact on your business. What do you expect the impact to be on supply and demand, and what affect will it have on sales, gross margin, profit, cashflow and working capital during the different phases of the crisis? This scenario analysis will help to identify the range of forecasted reduction in revenue vs. current operating models, budgets and cost base.
3. Clarify crisis management priorities. Set clear priorities for your business to help orient the response and understand the core objectives of the shareholders and senior executive team. This could mean protecting any initial investment, limiting further funding requirements or protecting the competitive edge at all costs. The agreed objectives and priorities will guide a revised operational and business plan for each phase of this crisis.
4. Build an integrated 18-24 month crisis management plan. Identify a realistic suite of tactics to deliver on these priorities and develop new operational and financial plans to support their delivery. This could include developing revised operational plans and new management models for strategic cost reduction, working capital optimisation, new external funding plans or, perhaps permanently ceasing certain operations.
5. Execute plans and continuously monitor operational performance. Closely track your operational performance compared to the plan on a monthly basis, reviewing revenue, profit, working capital, funding and the cashflow position and ensure the key actions are being executed. Changes in the external environment will need to be continually assessed and reviewed for required adaptations to the plan.
Whatever the direction the crisis plan takes, the decisions that need to be made are tough. We believe that now is a critical time for businesses to not only ensure their survival but also safeguard for a prosperous future in the longer term.
For more information about the Business and Financial Sustainability Programme please visit the Mazars website.