Eleven years since the end of the last recession, the world is once again facing a global economic downturn, as a result of the COVID-19 outbreak..
The World Bank estimates that global GDP fell by 1.7% in the last recession, and businesses must be prepared for an even greater fall this time, as there seems to be no end in sight with regards to the pandemic.
The positive side of a massive economic downturn happening so soon after the last, is that we are able to look to our recent history to learn from our experiences there, and better prepare for recovery.
In a McKinsey study of approximately 1,100 major, publicly traded companies, there were three factors that came up the most with regards to surviving and succeeding during an economic decline. These were:
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Increased productivity levels, and ensuring that these improvements were adhered to
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Refined financial processes, including cost cutting and debt depreciation
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Smarter M&A decisions
The McKinsey document offers a range of suggestions for improvements on these factors, but here are some ideas in brief to get you started.
Employee Productivity
During the current crisis, every industry can expect to have their employee productivity impacted. If employees become sick then they are not able to work, and will have to remain in isolation for the time period set out in legislation (a minimum of 10 days in the UK).
Any staff members exposed to COVID-19 by another staff member must isolate for 14 days, and employees with family members who are affected may also need to isolate. Furthermore, in the case of school and childcare centres being shut down, employees may require time off or flexible hours.
To help your employees to stay healthy, and mitigate the risks posed by coronavirus, it is important to:
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Assess your business’s ability to have employees work from home, host remote meetings and employ video conferencing. If you are able to have the majority of your workforce working from home, evaluate which employees are necessary on-site and how to keep those roles active.
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Be cognizant of public health guidelines from the Government and the World Health Organisation (WHO), and make sure that your workplace is covid-secure by taking every precaution that you can. Implement cleaning and hand washing protocols and ensure compliance throughout the workplace.
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Tighten cybersecurity across all company systems to ensure the safety of systems when people are working remotely. Be aware of employees with less confidence in the system and provide training and support as required.
Supply Chains
Disruption to supply chains is likely to be an ongoing issue, as much of the world’s economy comes from homogenous logistics networks spanning the entire globe. As countries enter lockdown again due to further waves of the virus, different areas of your supply chain are likely to be affected, leading to purchasing delays and slowdown of your overall output.
It is less easy to plan for disruptions in your supply chain, as this is harder to predict. But there are still things you can do to minimise the risks:
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Stay in constant communication with your suppliers. Make sure that you are sharing information and keeping them in the loop, to encourage them to do the same with you. Being ahead of problems will help you to fix them before they cause issues.
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Monitor your inbound orders and consumer demand. You don’t want to waste resources on stock that isn’t selling, just as you shouldn’t miss out on an uptick in demand for something you hadn’t predicted.
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Re-evaluate your supply chain to note any changes that could be made. Perhaps it would be useful to switch to a local supplier, or order in bulk to ensure a ready supply of something.
Cost Optimisation
Strategic cost optimisation can be key to perseverance during a recession. Ensuring that you are using the money that you have in the best possible way can be crucial to the survival of your business.
Some strategies that you might employ include:
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Streamlining your operations and supply chains. It may be helpful during this time to cut your product range down to a small number of key products, or simplifying complex manufacturing procedures.
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Assess your current IT infrastructure to leverage technology where you can in order to reduce labour costs, and withdraw redundant software or applications.
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Speak with suppliers to see if you can arrange discounts. You may find that your vendors are more happy to offer deals if this means that they secure more business during this time.
M&A
Although it may seem risky to go ahead with mergers and acquisitions during this time, as long as you have procedures in place to mitigate liabilities then this should not be a problem. During negotiations you should discuss:
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Adding clauses to any contracts that allow parties to walk away without consequences, should the situation change for the worse.
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Whether it is a good idea to pause discussions until a better time, and under what circumstances it would be favourable to pick up the process again.
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What practical due diligence is required during this time in order to secure the safety of both parties.
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Inserting conditional warranties and indemnities into the contract that cover the new circumstances.
For sellers, it could be useful to think about what will happen if the buyer suffers financial problems down the line, and put mechanisms into place that will ensure that you remain a priority and will receive payment. It is useful to speak with a professional when drawing up any contract, in order to best decide which procedures need to be put into place to protect both parties.
The ‘New Normal’
Whilst it is tempting to focus on a time when the economy has recovered, and getting back to ‘business as usual’, recovery from this particular crisis depends on learning lessons, and creating an evolutionary ‘new normal’ that works to endure the current situation, and simultaneously prepares us for whatever comes next.
The fact is that there is a strong chance that the world will never return to what we currently see as ‘normal’, even after the outbreak ends. There are new threats and possibilities now that businesses can work to their advantage, using the resources they built during this time.
With this in mind, businesses should be able to see that the key to resilience during a recession is getting an understanding of what might happen next – and making plans to stay the course.
If you need help in increasing your financial resilience An Accounting Gem can help. Our fully qualified and experienced accountants can help you to truly understand your company’s finances so that you know where you can cut expenses safely but still be able to weather any further disruptive events due to the current pandemic.
Please call us on 01473 744 700 or send us an email at contactus@aag-accountants.co.uk and we will get back in touch with you ASAP. We are here to help you every step of the way.
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