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Covid-19 Business Unusual: How should SMEs tackle it?

Covid-19 Business Unusual: How should SMEs tackle it?

Leadership & Management

Abheek Chaudhari

Abheek Chaudhari

16 Apr 2020, 09:30 — 6 min read

What is the impact of the Covid-19 pandemic?

  • Global, rapid and intense
  • Crisis akin to a Third World War
  • Cash frozen, wealth and employment have vaporized in few weeks
  • Years of bull market gains [upwards of US$10 trillion] wiped out in few weeks
  • Startups funding and M&A activities have come to standstill. Will take a while to resume
  • Companies and individuals are going to hold cash – Sign for major liquidity crunch
  • Banking will see more NPAs [Incl. retail] in coming years – May harden banks to lend further
  • Distress signal for airlines, tourism, event management, logistics, restaurants, entertainment industries

 

Also read: COVID 19 – Smart survival for self and business

 

What are immediate risks for you?

  • Cash inflow taps frozen – collections, new revenue
  • Obligations clock is NOT frozen – interest, employees etc.
  • Fixed Costs……
  • Payment to suppliers, liquidated damage issues, force majeure issues. 
  • Additional liquidity may be tough to find

 

What to do?

  • Identify key members to make a “war-room” team to evaluate daily situation and plan ahead
  • Model your risks. Make multiple P&L + Cashflow scenario. Plan for the worst
  • There could be opportunities as well – we learn that Alcohol manufacturers are now making Sanitizers, Engineering Companies can make Ventilators, moulding companies can make hospital beds
  • Plan for short-term and mid-term.
  • Current consensus on short term is till end of June
  • Long term impact will be more permanent than 9/11 – no one has a clue now. Survival (liquidity) is the only goal everything else can wait

 

Also read: Business continuity plan amidst COVID-19: Immediate action points

1. Conserve Cash – for Survival & Revival

  • Offer cash discounts to customers for faster collection
  • Freeze all your discretionary expenses
  • Thorough review of marketing strategy & expenditure
  • Make scenario analysis for manpower & salary – discuss pay cut/ deferment
  • Hold back incentives, bonus & increments
  • Postpone major expansion plans & Capex
  • Discuss reduction or deferment from key vendors
  • Talk to your landlord for relief in rent – best time to negotiate
  • Hold enough cash to kickstart working capital cycle

 

2. Debt, Insurance & Government Obligations

  • Consider holding back your government obligations as their cost is below CC cost
  • Talk to banks for postponement of principal repayment – RBI Action is not automatic – you need to write to your bank
  • Insurance Premiums provide for grace period of 30 days – but better not to avail
  • Push ESIC to pay salaries for covered workers – as if they are impacted by sickness
  • Explore new debt options – bill discounting etc
  • Keep a headroom for collateral ready – There might be sudden demand for cash

 

3. Force Majeure

  • Government has clarified that this incident qualifies as a Force Majeure event
  • Even if Force Majeure is not in your contract, you could still invoke “Doctrine of Frustration” under section 56 for impossibility of performance
  • But there are many technicalities – Get in touch with your lawyer and be prepared

 

4. Remodel your business

Prepare multiple P&L & Cashflow scenarios to understand risk & be ready for potential tough decisions

 

Cautious Plan

  • Impact – short term revenue ZERO & minor operational challenges
  • Action - Talk to your customers, ensure smooth supply chain & work on cost optimization

 

Severe downturn

  • Impact – Revenue slow-down for months to come, shutting down of few BUs or products
  • Action – Look for alternate avenues, temporary close operations & cost reduction is the key

 

Worst case scenario

  • Impact – Drastic drop in revenue & greater risk of negative cash
  • Action – Shutdown High Fixed Cost cost centres, plan for lean management,

 

5. Use time to enhance you to next version

  • Leaders will have to maintain healthy state of mind – keep calm
  • Develop a new hobby or learn a new skill
  • You can NOT say that you do not have the time
  • Use online resources to stay healthy
  • Sleep well

 

6. Prioritise

  • Reconfigure your Supply Chain
  • Prepare a rapid re-launch plan
  • Wake up call to go DIGITAL – has to be part of relaunch strategy
  • Resources are available cheap – make use of them

 

7. Post COVID-19… some thoughts

  • Quite possible that the end to this virus is rapid
  • Hence, always be ready to hit the ground running
  • Western world will behave very differently to Eastern World
  • Recovery will be V shaped for India
  • Aggregate demand will revive for consumer-focused industries first and will graduate upwards
  • Pharma, Digital Media, Fintech, Healthcare, Consumer staples will bounce back faster
  • Oil & Gas industry will be sluggish – there is now added trouble of fight for market share between producers

 

How can we help you?

  • Access to panel of CFOs

Free access to our panel of CFOs to understand best current practices & bounce your ideas

  • Engage us as your trusted partner

We will help you get your financial task plan up and running with multiple case scenario

 

Also read: An unprecedented challenge, also an opportunity for SMEs to do unprecedented things

 

Image source: shutterstock.com


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Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views, official policy or position of GlobalLinker.

Posted by

Abheek Chaudhari

Abheek is a Chartered Accountant and has experience of over 20 years across industries in India.. Adept in Manufacturing and Services space; he has a diverse experience of working...

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