Recovery: Is it too early to consider?

The rapid on-set of the economic impacts arising from Covid-19 and its resultant disruption to the economy has blindsided the entire business community. Whilst in some industries such as Aviation, Hospitality and Tourism the impacts have resulted in almost instantaneous shut down, for many other industries the impacts may not be felt for many months to come.

Government response has to support the Covid-19 economic disruption has been swift but is focused on the immediate employment impacts of the economic disruption. Those responses and in many cases the plans put in place by business and industry, have not addressed the recovery financial support that will be needed for industries and individual businesses.  Careful consideration to the impacts on a business’s cash flow still needs to be considered by all and should be considered now to avoid further potential localized financial disruption as the word’s economy begins to recover.

Recent research that was conducted across 4,000 Australian SME’s took a deep dive into the catastrophic consequences of failing to manage both financial and non-financial risks within a business. The research focused on the key risk and value drivers (financial and non-financial risks) that confronted. SMEs and the resultant threats posed by both internal and external threats, Covid-19 being a graphic example of one such risk.

The 2020/21 SME research report identified two key risks to the SME sector which are being played out in our business community right now. Statistically,

• 78% of SMEs are vulnerable to even a short term shock or disruption, indicating they hold either no cash reserves (20%) or ‘limited’ cash reserves (58%).
• Only a quarter (26%) of SMEs engaged in regular planning, with only 6% having comprehensive current plans that were actively managed.

Further, a key insight was that if business and potentially entire industries are to survive and thrive, it will be integral that SME’s have a sounding board they can turn to in order to reduce their internal and external risks and to assist with robust planning they can be held accountable to.

The current Covid-19 crises confronting business and industries has three phases to be traversed;

1  The crisis phase and the resultant crisis management and decision making, and

2  The stabilization phase or getting through the disruption ,and

3  The recovery phase, returning to normal economic conditions which for some industries could take years.

Most businesses should already have in place their plans to manage the immediate crisis and have worked out and implemented the funding and management decision required to get through phases 1 and 2. Consideration should now be starting to focus on the recovery phase and what does that look like. Delaying this vital action until after the curve has been flattened and life begins to return to normal may well be too last. There are three distinct actions that should be taken now.

1   Prepare the post disruption business plan and resultant financial forecasts. For most business and industries, careful consideration will need to be taken as to the time it will take to return to pre Covid-19 trading conditions, if that is at all possible. In some instances business plans that are already on place (you do have those) will need to be completely refreshed. Tested assumptions and a three way forecast (profit and loss, balance sheet and cash flow) for a period of three years will need to be assembled to ensure the business remains viable and that the correct funding sources can be obtained for the recovery phase.

2  Business risks and value drivers need to be assessed for the new normal that will eventuate.

3  Funding required to deal with negative cash flows and balance sheet restructuring should be secured and the recovery plan communicated.

Take steps now and seek advice from business and industry specialists. Advocate through industry groups and the government that recovery assistance should include grant and other structural long term loan funding required to complete any business and industry restructuring and to get the vital advice necessary to help the SME sector back on its feet, re-employing staff and returning business and industries to being sustainable.

For a copy of the Executive Summary of the 2020/21 SME Research report click here.