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Business Strategies to Survive the COVID-19 Crisis

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Internationally, Economists are predicting that the COVID-19 Crisis will result in the worst recession since the Great Depression in the 1920s.

Business owners are extremely worried about the long term implication of the crisis and survival of their businesses. The Vanuatu Government should be applauded for its plans to implement an economic stimulus package with the Employee Stabilisation Payment programme and Financial Institutions like the banks and the VNPF have announced policies to assist both employers and employees. In Vanuatu, business conditions were already depressed in 2019 before the COVID-19 crisis arrived.

What Should Small Businesses Do to Survive the Economic Crisis?

Comprehensive Assessment of Financial Position

Before deciding on a future strategy, businesses and their owners need to do a realistic and frank assessment of their financial position to determine the financial health of their enterprise. This is the most important thing that is currently needed before any decisions can be made. This data will also assist the banks in their assessment of how they will work with their clients to manage the situation. Those with poor accounting records will need assistance from an accountant or financial planner.

At the beginning of April, Business Link Pacific announced a COVID-19 support package that provides up to 100% subsidies to small enterprises for assistance from approved BLP business advisors. The amount of the subsidy has a maximum value of NZD5,000. Business Link Pacific is a private sector development programme to support small businesses in the Pacific and is funded by the New Zealand Ministry of Foreign Affairs and Trade (MFAT). In Vanuatu, there are a number of registered business advisors who are working with BLP and the VCCI to reach out to small business owners in taking advantage of this programme.

Under the current conditions, the most important area to focus is cash flow. Many business owners have found themselves without any income and have had to use existing reserves to continue operating. With a comprehensive financial health check, these questions will need to be answered.

  • How much cash reserves are available and how much longer under the current situation will the business be able to meet its commitments?
  • Was the business operating profitably before; will it be able to maintain profitability currently, and with a return to normalcy after the crisis is over, will the business still be viable in the long term?
  • Is the business solvent and does it have sufficient assets to cover liabilities?

Enterprises that may be in trouble can be separated in to two categories.

  • Previously operating at a loss, without long term prospect of survival
  • Previously operating profitably, and financially viable post COVID-19 crisis but currently trading at a loss or experiencing cash flow difficulties.
vatu crisis

Uncertain Viability in the long term

During the current crisis, it would be realistic to accept the fact that there will be permanent closures of some businesses. These would have been those enterprises that were already experiencing difficulties before the COVID-19 crisis and are now facing a larger problem. The acceptance that there is no long-term viability of the business, and to close permanently will not only help preserve assets and wealth for owners but also avoid the future waste of resources that will be needed to maintain future operations. Business owners in this category need to make the hard decision to close their businesses, terminate staff and work out a plan to liquidate any remaining assets so that staff and creditors can paid off.

Long Term Viability but Currently unprofitable or Experiencing Cash Flow difficulties.

Survival in the long term is the objective and if businesses are financially sound but are currently suffering under the crisis with negative cash flows, it will require assistance from its bankers or an injection of capital from shareholders. Any additional borrowings will ultimately need to be repaid to banks so it is critical that with the assistance of accountants and financial planners, an accurate projection of profitability and cash flows are prepared. These projections will need to budget for any income if any and overheads. Operating costs will need to be scrutinized, reduced where possible and hard decisions made on staffing. With the projections, businesses will be able to determine the level of operating losses over the time period before a return to profitability. The old adage that we should hope for the best and plan for the worst needs to be followed. How long the current crisis will last before the situation improves is uncertain so it is best to plan for at least 12 months before normality.

Under the current crisis, all businesses will be affected directly or indirectly. Even those businesses which have traditionally been recession proof will notice a number of trends. There will be downward pressure on revenues as consumer spending falls as a result of increased unemployment. Those businesses who have traded with the Tourism and Hospitality sector will be affected as commerce in this sector stops and Trade Receivables balances will increase due to customers facing difficulties in paying accounts. Under this situation businesses may experience liquidity problems even if the business is trading profitably.

If financial projections for the next twelve months show a deficit in Funding, even with cost cutting this is a funding gap which needs to be addressed.

This funding gap can be covered in a number of ways.

  • 1. Sale of surplus fixed assets and reduced working capital tied up in inventory
  • 2. Aggressive pursuit of Debtors and tightening up of terms offered to clients
  • 3. Negotiated scheme of arrangements with creditors and landlords
  • 4. Bank loans
  • 5. Injection of capital from Shareholders to cover

Sale of Surplus assets

A lot of Enterprises have surplus assets. Apart from halting all capital expenditure, businesses should review the assets it may have and should there be any that are surplus to the core operating business, it can be disposed of and turned in to cash.

Control of Accounts receivable

Businesses may be profitable but if they can’t control trade debtors, this can severely impact cash flow. In Vanuatu, it is common for many businesses to have a majority of their Trade Debtors aged in excess of normal credit terms of 30 days from Statement date. Overdue accounts in excess of 90 days is not uncommon and a good way of generating additional funds is reducing the average collection period. As an example, if a business had a turnover of 10m per month and the average collection period was 90 days, then the Trade Receivables balance would be 30m vatu. By aggressive pursuit of debtors and reducing this to 60 days, 10m vatu can be generated in funds that would have in the past been tied up in receivables.

Negotiated Scheme of Arrangement with Creditors and Landlords

When cash flow dries up, it will become difficult to pay suppliers who have extended credit to businesses. In addition, monthly outgoings like power, telecoms, and monthly rental commitments for rented premises will come under pressure. Under these circumstances, creditors need to be contacted so that arrangements can be made to repay by instalments once a financial plan can be put in place. Landlords can also be approached for rent reduction and most would be willing to discuss what is affordable as it is in their interest to also look after the future survival of their tenants.

Bank Borrowing and Renegotiation of Bank Loan facilities

If there is a significant gap in funding, additional bank borrowings would be an option but will be dependent upon whether the borrower has sufficient security to cover and there is long term viability of the business. It is important that business owners are aware that borrowing to cover funding shortfalls will need to be repaid, along with interest so a medium to long term Profit and Loss and Cash Flow projection for the business will need to be prepared. In this situation, any bank borrowings should be negotiated with banks to be repaid over as long a term as possible and therefore place less pressure on the operating cash flows. The Financing principle here is that short term fluctuations in funding requirements can be funded with short term borrowings like overdraft facilities, but operating losses cannot be covered in the short term. Operating losses need to be funded with long term funding options.

If the business is generally trading profitably, there are a number of ways to address short to medium term cash flow problems. Cash Flow problems may be caused by a number of factors. If customers are having difficulty settling monthly accounts, and merchants are overstocked in inventory due to falls in sales, the result of this is funds being tied up in current assets on the balance sheets. With corrective action, this can be resolved over time. The immediate option would be to obtain an increase in bank overdraft facilities to provide bridging finance and term loans can be renegotiated to reduce the monthly repayments. Some banks in Vanuatu have offered up to 6 months without loan repayments and others have agreed to convert loans to interest only. Also refinancing of existing bank loans to extend the terms can alleviate the monthly repayments.

Continue Marketing and Branding

One of the first things that businesses cut in their overheads is the Marketing budget. The reality is that when the business conditions are bad, the one thing that should be maintained is some form of marketing so that when the crisis is over, the business is well position to return to profitability. Marketing is vital to sustain sales and branding of products. Slow times are no excuse for slacking off on marketing and it is always easier to look after your clients than to win new ones. Marketing plans needs to be formulated to take in to consideration the current situation.

Time to Tidy up your Administrative Affairs

During quiet periods, it may be a good time to sort out all your administrative affairs that have been neglected when things were busy. These include filing, throwing out all the unnecessary paperwork that has accumulated, updating of all corporate records. A good spring clean of the office to prepare for when things finally get back to normal.

The COVID-19 crisis is affecting the whole world. Like the blue skies many residents are now seeing in their large previously polluted cities, when the world economy eventually comes out of this situation, there is a silver lining. The COVID-19 crisis has forced many business enterprises to take a hard look at their Financial Health and business viability, to take whatever medicine has been forced on them to survive and ultimately many will come out at the end of this much leaner and better prepared to face future challenges.