By Raef Lawson
It is now clear that the recovery from the COVID-19 pandemic will not be uniform. While China, Germany, and many other countries are tentatively opening up commerce as new infection rates drop, the United States, Brazil and India are still experiencing rising rates of infection, which is stalling or reversing reopening efforts.
The uneven impact of the pandemic is clearly reflected in business confidence. According to the Global Economic Conditions Survey (GECS) Q2 2020 report, carried out jointly by IMA® (Institute of Management Accountants) and ACCA (Association of Chartered Certified Accountants), confidence has either dipped or risen since Q1 2020 depending on the region. Finance professionals in Asia-Pacific and Western Europe are comparatively more confident in prospects for economic recovery than those in South Asia and Africa, and this lack of uniformity holds substantial implications for reopening plans.
Disparate reopening plans are going to continue to hurt small businesses, as they are particularly vulnerable to the economic impact of the coronavirus due to a lack of financial resources as compared to larger companies. With fewer resources available, many small businesses likely have not developed comprehensive response and recovery plans yet.
Whether a company operates in a hot spot or in an area where the virus is under control though, finance professionals need to be planning for the eventual reopening of the economy to ensure they can recover quickly and safely.
Small Business Planning & What We’ve Seen
The lack of certainty surrounding reopening plans will make it difficult for small businesses to prepare for business resumption, especially as financial resources are likely to be constrained. IMA’s Small Business Committee (SBC), a technical committee tasked with addressing the issues that impact small and medium-sized organizations, developed a three-step plan to guide small businesses through the recovery process, aiming to ensure business continuity in a time of crisis.
The SBC advocates a recovery planning framework that allows finance professionals within small businesses to assess, build, and communicate their way through crisis.
First, in order to position themselves to successfully emerge from a crisis that threatens business continuity, small businesses should take the time to assess their current situation, preferably with a team of experts. This involves an evaluation of cash flow considerations and operational costs, as well as an application of the 80/20 rule, as they will want to identify the 20 percent of customers that bring in 80 percent of the revenue, reducing extraneous costs of business.
In countries that have experienced a slower recovery from the pandemic than others, it can be particularly helpful for finance professionals to learn from the challenges and financial strategies of small businesses in countries that experienced the outbreak earlier. In February, IMA and the Shanghai National Accounting Institute (SNAI) partnered to conduct a survey of finance professionals in China about the challenges of facing the COVID-19 public health crisis.
Consistent with the SBC’s recommendation to evaluate cash flow considerations as a first step to developing an effective response and recovery plan, the joint IMA-SNAI survey found that poor cash flow was one of the top challenges facing enterprises as they conducted business amid the pandemic. These considerations were more important for small businesses, as there was a higher percentage of enterprises with fewer than 500 employees whose cash flow could sustain for less than three months, compared to companies of other sizes.
Second, in addition to an examination of cashflow, management accountants should appraise current standing contracts and if necessary, renegotiate those contracts to obtain more understanding terms. Further evaluations of succession plans, buy-sell agreements, insurance policies, contracts with suppliers, and loan agreements are also mandatory once finance professionals gain an understanding of the current cash position.
Third, once planning has been developed, the goals and objectives of each initiative within the response and recovery plan must be communicated clearly and continuously. This will ensure that all actors involved are held accountable for their responsibilities, positioning the business to move forward successfully in a time of uncertainty. Clear and continuous communication presents a preparedness that is essential for small businesses to effectively emerge from the crisis.
In China, the IMA-SNAI survey found that a lack of risk prevention awareness and risk management mechanisms left small enterprises unprepared to develop effective crisis recovery plans. Assessing cash flow considerations, building a plan, and communicating clearly across the organization can enable small businesses to manage through crises that cause disruption, even as they are prolonged for months.
Pandemic Response: Two Scenarios to Plan For
The GECS report predicts two scenarios for finance professionals to consider when planning for reopening. The first is that there is no significant second wave of virus infections leading to renewed lockdown measures and an inevitable return to recession. On this assumption, we expect the global economy to recover in the second half of this year and through 2021. However, even in this rosy scenario, most advanced economies are not likely to reach end-2019 levels of output until at least the second half of 2022.
The second scenario is that of a second wave. An increasing number of infections in Europe, South America and many U.S. states has raised fears of a second wave of the pandemic that leads to renewed lockdowns in a significant proportion of the world.
The implications of this scenario are dire for the global economy. The June OECD Economic Outlook contains two forecast scenarios, considered to be equally likely. The second of these, termed “double-hit,” involves renewed virus outbreaks in all economies in the second half of this year. The effect is to add a further 1.6 percentage points to this year’s global GDP contraction.
As small businesses confront the uncertainty surrounding reopening plans across world, it is imperative they develop a stable, organized process for moving forward – a framework that enables them to assess, build, and communicate toward a successful future.