Articles

COVID-19: Long term planning

12 Mar 2020 | 1 minute read

What if China or large parts of the world largely shutdown for an extended period? Did business anticipate the spread of the virus reaching pandemic levels beyond China? If not, then this is a wake-up call to consider other worst-case scenarios. What are the potential implications for your business and your marketplace? Getting a rounded picture requires a holistic view of the business which, we suggest, should be orchestrated by a cool head taking a broad view.

In larger businesses communication is critical. If there are potential issues in the supply chain do the sales team know what to do to mirror delivery levels? In some businesses procurement rarely speak to sales and neither speak to accounts. And they are often measured on different KPIs.

At a high level this is about alignment across whole business and will need leadership.  Depending on the size and nature of your business that could be the MD, CEO, GC, Risk Manager, Chair or NED. It probably won't be a functional head who will have a narrower perspective and may be caught up in front line challenges.

A cool wise head will elicit the input of key stakeholders internally and then externally. This does not need to be bureaucratic. But it does need to be structured and positively led. A short sharp exercise in the first instance can identify key themes. Get your key internal stakeholders in the room and brainstorm it. This is likely to include those with responsibility for Finance, HR, Marketing, Procurement, Purchasing, Operations and PR depending on your business. They can provide a ground up perspective of the potential effects of best- and worst-case scenarios.

Then repeat. And again. Take the themes and learnings from the operational crisis management team to test and validate the medium- and long-term view. If the worst-case scenario does materialise, you will be as prepared as you can be. If it does not materialise you will have reaped the benefits of a ground up review of your business which may have uncovered ideas for other improvements and enhanced internal collaboration.

Areas to consider

  • How will a material slowdown in the medium to long term impact on employee numbers?
  • How should we plan for this now? We are seeing this play out in a number of ways – pausing planned recruitment, increasing or decreasing use of flexible resource such as consultants (made easier by the deferral of IR35), natural attrition, performance management, reduced hours, temporary layoffs, voluntary wage cuts (led from the front?) All balanced against anticipated future resource needs when the economy rebounds.

    • Understand what is supplied to whom from whom – how much might be stockpiled (already produced) and where is it located? Can we stockpile some or all supplies?
    • Who controls any stocks – keep them paid? Beware unscrupulous suppliers seeing an opportunity to make a margin here where they haven’t been paid by clawing back and then selling “excess” stock at higher prices.
    • Customer expectations may need to be managed. Can delivery times be rescheduled? Is there flexibility notwithstanding the contractual terms? Will competitors be facing the same challenges?
    • Working with existing suppliers to understand their challenges, switching to back up suppliers (before your competitors do) and identifying alternative ones for future long-term capacity. What does your plan B supply chain look like? How long will it take to switch supplier – there would have been merit in planning before trading problems arose! Is a diversified supply chain sensible in any event?
    • Or even working with competitors – have they stock that you need, and do you have stock they might need? There may be circumstances where better for you both to manage rather than both to suffer pain?
    • Can you/should you shift supply activity to supply the country needs

    • Does the analysis lead us to think differently about our markets, our suppliers, how we do business?

    • Model cash flow in differing macro-economic scenarios Model cash flow scenarios if your key business risks materialise – particularly relevant in tight margin businesses
  • Model cash flow scenarios if your key business risks materialise – particularly relevant in tight margin businesses
  • Consider impact on banking covenants and availability of credit insurance
  • Consider early conversations with bankers and brokers – up front conversations are invariably more productive if extra facilities are required or covenants are in peril.
    • Insurance brokers advice on existing cover and future risk transfer? If you have Business Interruption cover what does it actually cover?

  • Does the cashflow forecast, in a worst-case scenario, give rise to the need to reflect carefully on the interests of creditors rather than shareholders. If it does, who will take ownership for monitoring and managing this?
  • For example, what is the creditor position? How might it be stretched where needed and what risks in doing so? What are the implications for creditors and lenders of taking advantage of government s?
  • If yours is a deposit taking business for large purchases, is the business confident it can deliver because if not do you need to think about ringfencing the deposits (and how does that impact cashflow?).
  • In the most difficult situations will you need to balance between avoiding personal liability for wrongful trading by making a creditor position worse when you knew you could not avoid an insolvency (if they project cashflows and balance sheet forward they should know when they might reach the point of no return). If so, how can you go on the front foot, having recognised early any potential for financial distress and putting alternative plans in place to address them. This is simply good business practice but heightened because there is a major risk area.

    • Communication with key internal and external stakeholders is vital as mentioned already.
    • As important is communication with your people, not only around immediate risks but any longer-term mitigation and change of strategy.
    • Where a positive external message can give you competitor advantage and calm market jitters consider whether you need to manage the press and can you push positive stories to protect or promote your brand?

    Areas to consider

  • How will a material slowdown in the medium to long term impact on employee numbers?
  • How should we plan for this now? We are seeing this play out in a number of ways – pausing planned recruitment, increasing or decreasing use of flexible resource such as consultants (made easier by the deferral of IR35), natural attrition, performance management, reduced hours, temporary layoffs, voluntary wage cuts (led from the front?) All balanced against anticipated future resource needs when the economy rebounds.
    • Understand what is supplied to whom from whom – how much might be stockpiled (already produced) and where is it located? Can we stockpile some or all supplies?
    • Who controls any stocks – keep them paid? Beware unscrupulous suppliers seeing an opportunity to make a margin here where they haven’t been paid by clawing back and then selling “excess” stock at higher prices.
    • Customer expectations may need to be managed. Can delivery times be rescheduled? Is there flexibility notwithstanding the contractual terms? Will competitors be facing the same challenges?
    • Working with existing suppliers to understand their challenges, switching to back up suppliers (before your competitors do) and identifying alternative ones for future long-term capacity. What does your plan B supply chain look like? How long will it take to switch supplier – there would have been merit in planning before trading problems arose! Is a diversified supply chain sensible in any event?
    • Or even working with competitors – have they stock that you need, and do you have stock they might need? There may be circumstances where better for you both to manage rather than both to suffer pain?
    • Can you/should you shift supply activity to supply the country needs
    • Does the analysis lead us to think differently about our markets, our suppliers, how we do business?
    • Model cash flow in differing macro-economic scenarios Model cash flow scenarios if your key business risks materialise – particularly relevant in tight margin businesses
  • Model cash flow scenarios if your key business risks materialise – particularly relevant in tight margin businesses
  • Consider impact on banking covenants and availability of credit insurance
  • Consider early conversations with bankers and brokers – up front conversations are invariably more productive if extra facilities are required or covenants are in peril.
    • Insurance brokers advice on existing cover and future risk transfer? If you have Business Interruption cover what does it actually cover?
  • Does the cashflow forecast, in a worst-case scenario, give rise to the need to reflect carefully on the interests of creditors rather than shareholders. If it does, who will take ownership for monitoring and managing this?
  • For example, what is the creditor position? How might it be stretched where needed and what risks in doing so? What are the implications for creditors and lenders of taking advantage of government s?
  • If yours is a deposit taking business for large purchases, is the business confident it can deliver because if not do you need to think about ringfencing the deposits (and how does that impact cashflow?).
  • In the most difficult situations will you need to balance between avoiding personal liability for wrongful trading by making a creditor position worse when you knew you could not avoid an insolvency (if they project cashflows and balance sheet forward they should know when they might reach the point of no return). If so, how can you go on the front foot, having recognised early any potential for financial distress and putting alternative plans in place to address them. This is simply good business practice but heightened because there is a major risk area.
    • Communication with key internal and external stakeholders is vital as mentioned already.
    • As important is communication with your people, not only around immediate risks but any longer-term mitigation and change of strategy.
    • Where a positive external message can give you competitor advantage and calm market jitters consider whether you need to manage the press and can you push positive stories to protect or promote your brand?
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