How to successfully face the challenges of the coronavirus crisis? What actions can be taken by those companies that are experiencing falling profits and liquidity strains?
The 2008 crisis had many causes, but one of the most decisive was the puncture of a speculative bubble. It required a strong reconversion of most credit institutions and many companies that were overindebted. It also required a major correction in property prices. At that time, the collapse of the stock market and other financial markets and the problems of many banks fueled a general panic. Fortunately, the Group of 20 (which brings together the leading countries, which represent 66% of the world’s population and 85% of the world’s gross domestic product) met within a few months and took a series of measures underpinned the World economy, avoiding greater evils. Despite this, some countries, such as those in southern Europe, took several years to emerge from the well.
In the coronavirus crisis, the cause has not been a speculative bubble, but a virus that has caused a pandemic, which has led to an unprecedented drop in economic activity. Fortunately, at the beginning of the crisis, banks were more healthy and had liquidity; but, on the other hand, the public sector was much more indebted than in 2008. The consequences of this fall in economic activity are similar to those of 2008: increased delinquencies, bankruptcy, company closings, unemployment, and reduced welfare. Of broad layers of the population (see table 1).
This article presents various measures that can help many companies successfully face the challenges posed by the coronavirus crisis, especially in cases where there are drops in profits and liquidity tensions. Some of the measures that will be proposed are not easy to take. When things are going well, and companies generate profits and liquidity, it is easier to lead. There is scope to increase remuneration and incentives, to make investments and to finance growth. However, in crisis years, there is less scope for joys, and cost containment is necessary, which can undermine the working environment and relationships with other stakeholders, such as suppliers or shareholders. Therefore, the people who lead it are much more complicated.
The relevant role of governments
All crises generate a lot of uncertainty and suffering. In the coronavirus case, there is also the affectation in health, which, without any doubt, is the most important. Furthermore, there are also negative consequences that affect people’s well-being: reduced income, loss of employment, etc. In any case, as it is a crisis of a very localized origin and which does not require significant corrections to be made of economic excesses – unlike what a speculative bubble implies – if the pandemic does not last longer than expected, The economic downturn can be limited, and the recovery can be faster.
Today, we already know that, when an economic crisis erupts, it is essential that governments act quickly and forcefully rescuing the economy to avoid a spiral of company closings and increased unemployment. This was not known in 1929, but today it is. Recall that, in 1929, the predominant ideology was the liberal one, which considered that, when a crisis occurred, governments did not have to act, since they had to let the market fix everything alone. That vision of the economy caused what is known as the Great Depression. As the welfare state was very poorly developed (there was no minimum wage, no unemployment insurance, no Social Security, no retirement pensions, no bank deposit guarantee, etc.), the governments’ inaction caused the bankruptcy of thousands of banks, and millions of people lost everything. The economy did not recover until the moment a few years later, governments came to the rescue of the economy, applying what is known as Keynesian measures since they were promoted by the Scottish economist John Maynard Keynes. In the 2008 crisis, this was already known; For this reason, countries like the United States came to the rescue of their economy, and it recovered quickly. In Europe, the reaction took longer and did not arrive until, in 2012, Mario DraghiThen President of the European Central Bank made the famous statement: “We will do whatever it takes to protect the euro, and believe me it will be enough.” From that moment, the economies of the weakest countries (Spain, Italy, Greece, Portugal.) began to improve. And the economic recovery, with continued reductions in unemployment, lasted until early 2020 when the coronavirus arrived.
The effects of COVID-19 have been immediate, economic activity has collapsed, and now the challenge is to save companies and jobs. To avoid greater evils, it is essential to use Keynesian measures and get governments to act very quickly with several types of tests:
• Immediate and lost funding subsidies for the most vulnerable part of the economy. This refers to the sectors most affected by the confinements and falls in activity (restaurants, hotels, airlines, culture, sports.) and a significant part of SMEs and the self-employed.
• Provide liquidity aids (loans and guarantees) that quickly reach the neediest companies and without too much bureaucracy.
• Promote public investment in infrastructure that, in addition to generating economic activity, contributes to improving business competitiveness and the well-being of the population.
If all these measures are carried out without wasting time, the economy can recover quickly (see Table 2). Organizations such as the International Monetary Fund have already communicated that their forecasts indicate that the fall of 2020 in many countries will recover with growth in 2021. In any case, it cannot be avoided that new crises will occur again in the future. The history of the economy shows that it is a commonplace that a new economic crisis occurs every seven or ten years. Furthermore, it cannot be ruled out that new pandemics such as that of the coronavirus arise.
If these measures are not taken, it can happen as in 2008, when unemployment reached very high levels, especially in southern Europe. But these measures undoubtedly increase public debt. Therefore, it will be necessary to improve the efficiency of federal spending and raise taxes, but the latter is less evil than what is lost if one does not act quickly and forcefully. Therefore, it is better to rescue the economy for a short period than to pay subsidies for years. If the authorities do it well, learn from international best practices, and save the economy for a time, the economic crisis will be shallower and shorter.
However, the work of governments, to be as effective as possible, must cooperate with citizens. Therefore, another factor that can be decisive for exiting the crisis is solidarity in all directions, and this affects all citizens.
Apart from what governments and citizens do, companies have to focus on what falls within their sphere of action. It is unusual not to be misled, since, amid a crisis, harmful and even false news ( fake news ) increase, which demoralizes and makes us lose concentration. Various types of measurements can be carried out.
- Protection of strategic assets
As a preliminary aspect that should guide our actions, we must protect assets that provide competitive advantages, such as the talent of the human team, the capacity for innovation, or the customer network.
• Regarding equipment, the health and well – being of workers must be prioritized. If, in difficult times, you bet on them, you can get more long-term commitment. It must be ensured that they are motivated and prepared for the changes that may occur. Therefore, in crises, companies have to prioritize measures that contribute to talent retention. If, due to health issues such as a virus, confinements occur, the processes must be reorganized so that the staff can work remotely and thus be able to offer more and better services through other channels (such as online) to the clients.
• But, in addition to the people who work in the company, other assets must be protected, such as customers, suppliers, shareholders, and any other interested parties. Therefore, it is convenient to analyze their needs and identify measures that can protect them and link them more with our company. For example, in the case of certain strategic suppliers, instead of delaying the payment of what we owe them, it may be convenient to anticipate it and contribute to its future viability. In other cases, it may be advantageous to expand supply sources by diversifying suppliers. For example, in the coronavirus crisis, there have been months in which the world’s factory (China) has been stopped, which has caused supply problems in many companies around the world. In the immediate future, it is possible that Sufficient stock of masks, tests, screens to isolate workers, etc.
- Ensure liquidity
During a crisis, most company closings occur due to illiquidity. Therefore, the control and Management of the treasury are also a priority. In many companies, the General Directorate has to work closely with the Finance Department to monitor the situation. It is necessary to verify that the financial situation is correct to face a recession. The company must have an adequate financial structure to prevent Management from losing concentration concerning what is essential: the products, the customers, the human team. Otherwise, when a company is overwhelmed by an excess of debts and due to the difficulty of meeting their payments, the Management neglects what can generate long-term competitiveness.
Among the measures that can help strengthen liquidity, the following can be mentioned:
• Expand capital when the level of indebtedness is very high. For the financial structure to be sound, the net worth must represent an integral part of the entire investment. In many sectors, the required capital (equity) is estimated to be at least 40% of all assets. If the net worth is insufficient, the company must make capital increases or sell assets. An additional difficulty is that, amid a recession, it is not easy to sell at a reasonable price. As we will recall later, amid a crisis, it is more comfortable – and convenient if liquidity is available – to buy than to sell. Those shareholders who are reluctant to increase capital have to consider that. Inevitably, in the years before the recession, the company had benefits. So,
• Freeze or defer investments that are not essential to maintain the company’s competitive advantages. These can be in price, quality, differentiation, technology, etc.
• Freeze or defer dividends for shareholders.
• Contract bank lines of credit, taking advantage of the lines and guarantees that governments can provide in times of crisis.
• When there are difficulties in servicing short-term debts, the debt must be renegotiated, especially banking, with the part that cannot be serviced in the short term being passed over the long term. If the company is capitalized, it will be easier for banks to help refinance debts.
• Renegotiate payment terms with suppliers.
• Anticipate customer charges by offering discounts for prompt payment.
- Take advantage of low prices.
When economic activity falls, prices for almost everything drop significantly. This affects, for example, stocks, real estate, and many other goods and services. Many studies show that successful companies are characterized by making the purchase or sale operations in the years that it touches. Acquisitions are made shortly after a crash, and sales when prices have already risen sharply before a bubble pops. Therefore, purchase opportunities may appear, if there is liquidity that will not be needed in the coming years, in topics such as the following:
• Properties that may be of interest to the company.
• Shares of solid companies and sectors with a future that goes below what is reasonable.
• Acquisitions of companies to enhance growth.
• Take advantage of low prices to close operations and buy products or services that will be needed later.
- Protect margins and profits
The fall in economic activity means less consumption and less investment, which can sink our company’s sales. So first, it’s about exploring what can be done to improve revenue:
• Bet on new business lines, innovating with products or services that satisfy needs related to the health crisis (medications, masks, gels, tests, respirators), and new requirements or new consumer buying habits (purchase by Internet, online services). For this, it is essential to pay attention to market movements and use open innovation systems. The participation of employees and customers can help discover new sources of income.
• Improve the discount policy and collection systems to adapt to customers’ situations and thus be able to sell more.
• Sales can be increased by giving additional guarantees to customers, such as the rights of return, if they do not recover from the crisis. This can give them more confidence to buy our products. In this case, the company is taking the risk of more returns in exchange for increasing sales.
• If you already have online services, you can increase your promotion to increase income. In 2020, for example, there have been companies that have experienced great growth in the technological field (Amazon, Netflix, Zoom, Houseparty …). Supermarket chains and technology product shops have greatly increased their sales through online channels. Good ideas have also appeared, such as fairs and virtual events, online training programs.
• Take advantage of the possibilities presented by social networks to improve the promotion and sale of our products.
But, in addition to improving revenue, you can take steps to act on costs:
• New, more sustainable ways of operating can be explored that reduce costs. This is the case of teleworking. A study from Stanford University (2017) concluded that improving teleworkers’ productivity in the United States is equivalent to fifty more days of work per year since they are less sick days and lose less time commuting to go to work. And office space savings can range from $ 2,000 to $ 10,000 per employee per year.
• Another cost reduction measure is to hold remote meetings by videoconference to reduce travel.
• You can also cut costs that the company has been considering for a long time, but which, to avoid problems, have continued to be assumed until now. A well-known example is Anheuser-Busch, which invested a lot of money to be the exclusive sponsor of the Winter Olympics. Still, it was an investment that had no impact on its customers, even though it motivated distributors. When the 2008 crisis erupted, they eliminated that item.
• To reduce costs, you can improve the efficiency of the investments we have in the balance sheet asset. This implies taking measures such as:
• Reduction of non-current assets, renting instead of buying or selling non-essential assets.
• Stock reduction. In this matter, it is worth remembering that a balance must be found between efficiency and guarantee of supply. To avoid that, a too low level of stocks could jeopardize supplies when any incident occurs (transport strike, factory closure due to viruses, etc.).
• Reduction of the maturation cycle. In other words, the period that elapses since raw materials is purchased, produced, sold, and collected from customers.
• Reduce customer balances through credit management techniques or customer collection management.
• Cash management, or treasury management, to reduce idle balances and minimize account overdrafts.
These types of measures can help the company achieve the maximum possible efficiency in its assets, and in this case, it will reduce its financing needs.
• To improve, you can also take measures that affect the ability to generate benefits :
• Reduction of the cost of materials (order planning, reduction of components, long-term contracts). In times of recession, it is possible to rethink the negotiations to obtain discounts, since suppliers may be interested in slowing down the drop in sales and, at the same time, guaranteeing customer loyalty with long-term contracts. In these cases, however, the company must take its social responsibility into account and not abuse a possible dominant position that could harm its suppliers.
• Pass fixed costs to variables to achieve a more flexible structure.
• Take advantage or sell waste. Therefore, the cost of transportation and destruction of garbage is transformed into an income when selling it.
• Cost reduction consultancies (energy, structure). Usually, these consultancies charge based on a percentage of the cost reduction achieved.
• Use new technologies to make processes cheaper. For example, using the Internet to buy, sell, or carry out other business processes.
• Reduce reduced quality costs with continuous improvement and full quality.
• Optimize costs using the zero-based budgeting technique, which eliminates waste through the analysis of all costs euro to euro. For this, it may be convenient to reformulate the budget, even if we are halfway through the year. In many cases, the drop in activity means that the budget approved for this exercise no longer makes much sense.
• Use the objective cost technique, which calculates the maximum cost that a product can cost when it has not yet been designed. To do this, it starts from the sale price at which customers will want to buy the product and subtracts the desired margin. The difference is the maximum cost that our product can have.
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A crisis is also an excellent time to undertake.
During the crisis years, fewer companies are created, and more are destroyed. Therefore, the number of companies is usually reduced. But, curiously, it is when organizations are created that can later be very successful. Table 3 shows some examples of well-known companies that were founded in years of crisis.
As a synthesis of the above, we can conclude that crises greatly complicate the progress of companies. If mistakes are made, the chances that the company will generate significant losses and end up closing are multiplied. Therefore, it is necessary to do excellent Management, especially in the most strategic aspects. Among the topics to prioritize, we can highlight giving confidence to people and safeguarding strategic assets, ensuring that liquidity is sufficient to meet commitments, and propping up profits by innovating in the business model to generate more income and control costs (see table 4). If these issues are appropriately managed, we will contribute to making the company sustainable in the long term.
On the other hand, a crisis is an excellent time to review what we do and what we don’t do. For example, in periods of confinement, many things stop being done and, instead, other new things are done. At the end of the confinements, it is worth considering whether it is necessary to return to previous practices or if some tasks or activities are not ultimately worthwhile. And vice versa: analyze whether some of the methods we adopt during confinement could be continued even when we are no longer confined.
Although it is not easy to survive and move forward amid a crisis if governments do it well, citizens cooperate, and companies take the appropriate measures, it is possible to generate value and emerge stronger. As is repeated every time a period of economic activity falls, crises are also sources of opportunities, and those who take advantage of them win.