CFOs around the world are concern that coronavirus pandemic will have a significant impact on their businesses, potentially reducing this year’s revenues and profit, as reported by a recent PWC survey.
Without a doubt, we are in a challenging moment and the pandemic will affect every company. Therefore, it is important for finance managers and CFOs to take some steps towards the impact of the virus on their business operations.
Impact of Coronavirus on business – CFO
As business executives, you must assess and prepare for the effects of the coronavirus on your firm’s operations. This will you to understand the risk surrounding your business and mitigate where possible.
In this article, we discuss five things every CFO need to during the Coronavirus crisis.
0. The most important step – employee’s health
Employees are the most important asset for any firm. We must, therefore, take proactive steps to protect the health and boost the morale employees. These steps may include issuing guidelines for physical distancing and work from home policy. Other measures include routine temperature checks, providing hand sanitizers and even wearing gloves and face masks depending on their roles.
1. Start with the impact of Coronavirus on the Value Chain
A clear understanding of your business value chain will help you to assess the possible impact on each key players. You can start by categorising the stakeholders in the value chain into groups. For instance, the groups can be vendors, employees, customers and financiers. You want to know if the virus will affect the suppliers’ ability to deliver orders on time, employees productivity, customers’ ability to pay dues on time, liquidity challenges for the business to pay financial obligations; just to name few areas. Of course, CFOs must perform the exercise with all the business partners. Ask everyone “how do you think this virus will impact your function of the business”.
2. Earning forecast
After compiling data from various functions or business heads, it is important for the finance team to forecast the impact of the virus on earnings, liquidity and capital using scenario planning. The business sales will be low if suppliers cannot deliver goods or services or if the firm cannot deliver to customers on time. On the other hand, the customers’ ability to pay the amount due affects impairments, profit. If a major receivable customer goes out of business, it will impact the liquidity position. As cash is the king, many investors are dumping equity investments and bonds for cash products. This situation can affect borrowing plans.
Scenario planning is a critical tool to test preparedness during crisis. Therefore, your forecast should use multiple scenarios such as the effect on regions, sectors, products using the worse and best-case scenario. If your firm has a business continuity plan, this may be the real-time to test the theory in the event that there is any lockdown in any your city, so that you can continue to do business. Furthermore, do not lose sight of the other risks such as cyber-security and other operational risks.
3. Communicate to the board, financiers and other stakeholders
Being proactive is one of the best things any management team can do during a crisis. The management must communicate with the relevant stakeholder and be transparent about the potential risk.
The results of the impact assessment should be shared with the board of directors and similar governing body. A high-level summary may be shared with the key financers such as bankers. This will help you to manage expectations and if the firm need support from either the shareholders or financiers, impact analysis will support their decision.
According to the 2020 Edelman Trust Barometer (pdf), business is more trusted than both the government and the media. You should also engage other stakeholders such as employees and regulators with clear communication about the change and possible action plan.
4. Strategic Cost and investment decision making
Times like economic crisis requires some measure of cost management and investment decision making. You may have to delay or reduce some non-essential cost such as business travels (for now) and hiring new staff. However, do not be too hard on cost-cutting or investments which can negatively impact your competitiveness after you come out of a downturn.
The decisions we make today as CFOs will impact the future of firm the after the recession.
5. Let us revisit the budget
Most firms prepared and locked their budget in the last quarter of the prior year with many reasonable macro-economic assumptions but not Coronavirus. These assumptions cannot work in times of uncertainty. Therefore, it is fair for the CFO and other management executives to engage the board for budget revision as the situation improves. The revision is important for two reasons: it acknowledges the fact the business situations have largely changed and also motivates the employees that numbers are reasonable.
In summary: As cities have shut down and countries have closed their borders, economic activities will be slow in all major cities. The credit spread of governments and the investment-grade firm has increased. The UK pounds sterling has declined against USD in all-time low (since 1985).
Therefore, the coronavirus will have an impact on every business. It is just a matter of when will it knock on your door, the impact and for how long; due to the uncertainty of further virus spread. As a CFO or finance manager, your leadership role is critical to help the company withstand the situation and you cannot do it without the support of the other business stakeholders.
If you are CFO of a consumer bank, read this Mckinsey article: Leading a consumer bank through the coronavirus pandemic
Note to you
It is essential that you follow the health advice and safety tips shared by health authorities and other bodies such as WHO. We should not promote fake news, discriminate against those who are infected. Practice more physical distance and more of social connection through technology.
This is an unusual, extraordinary and difficult time for all of us. At IG Business and Finance, we do understand that COVID-19 is impacting many people and causing others serious concern. We will continue to stay abreast of the situation in order to adapt to changing developments for good health.
We are confident that we will overcome this situation.