We are now into week 10 of lockdown and, after the government published its recovery strategy, it’s starting to feel like we’re perhaps coming to the end of the beginning of this crisis.
Many business leaders are now also taking time to reflect on where they have reached in their response to the pandemic – in part to satisfy shareholders, investors and lenders, but also to get an understanding of how they compare to others and what the path ahead looks like.
From a strategic perspective, we can think of that journey in four phases – which can be distilled into four (almost) Rs: reaction, resilience, recovery and the new reality.
The ‘reaction’ stage epitomised those early days when organisations had to make tough decisions at speed and act to protect their employees and business – whether that was closing down, putting operations into hibernation, furloughing staff, launching contingency plans or simply trying to respond to government directives.
Next is where we see many of our clients in the retail space currently – the ‘resilience’ phase – which involves building a stronger business that can better withstand the crisis over the months ahead.
It is beyond doubt that for many consumer-facing businesses, Covid-19 has prompted a paradigm shift. Even as the world tentatively starts to emerge from lockdown, social distancing measures will remain in place in some form for some time, affecting both demand and supply across the sector.
Whilst the lockdown period presented acute cash-burn pressures for most businesses as activity levels fell off, the next phase presents perhaps an even greater challenge.
Mobilising to kick-start revenue growth in a trading environment that will look very different for some time could place enormous pressure on working capital. Decisions on when, how and even if units are to be restarted cannot be taken lightly.
“While a scientific approach can be applied to forecasting in the short term, the uncertainties created by Covid-19 mean medium- and long-term forecasting becomes more of an art”
Economic history tells us that more businesses fail while emerging from a downturn than going into it or during it.
It is against this backdrop that forecasting has become mission-critical. Now is the time for pulling together robust cash flow forecasts that game different scenarios. Not only is this fundamental to survival in the short term, but it is a vital enabler to decision making regarding medium- and long-term viability.
Front of mind for CEOs will be the ability to accurately forecast their organisation’s cash needs and associated funding requirements.
To ensure cash is managed well, businesses should adopt appropriate cost controls and governance into their day-to-day operations. This may include the use of cash committees to review and challenge payment requests in situations of stress, which will give confidence to stakeholders when assessing short-term funding requests.
The new reality
While a scientific approach can be applied to forecasting in the short term, the uncertainties created by Covid-19 mean medium- and long-term forecasting becomes more of an art.
A credible view can be attained by overlaying sensible market analysis to demand forecasts using significant historical events, with probably the most relevant being the financial crisis of 2008/09.
However, with forecast consumer demand being one of the most difficult aspects of this crisis, this will not be easy. Will people want to go to a socially-distanced restaurant? We just don’t know.
“Only once resilience has been embedded should management teams start to think practically about how to create a business for the future”
A top-down approach can then be taken to determine whether the assumed demand fits the cost base or whether restructuring is required. Relevant sensitivities should then be applied to the base-line forecast, enabling a worse case view to be ascertained and planned for accordingly.
With forecasting forming a key plank of building financial resilience, coupled with actions to bolster operational and commercial resilience, companies can ensure that they are putting themselves in the best possible position to get through this period of extended uncertainty.
Only once this resilience has been embedded should management teams start to think practically about how to create a business for the future. This ‘recovery’ phase means preparing for how their sector will change and what it will demand of them.
In time, this will bring us to the ‘new reality’. The economy will undoubtedly emerge from this crisis in a very different shape from when we entered.
Those businesses that will endure will be those that have built resilience into their core and used that as the base from which to adapt and adjust.