The COVID-19 pandemic has resulted in a sharp decline in the performance of most industries, impacting both the economy and people. In this article, I highlight the corporate financial effects of this pandemic, along with introducing some corrective measures to reduce these effects.
COVID-19’s impact on corporate finance
Across the line, COVID-19 has negatively affected the corporate finance activities including, the working capital, profitability, liquidity and access to finance. However, the impact level is varied among industries, ranging from worst influenced businesses like construction, hoteling and restaurants, transportation, wholesalers and retailers and entertainment, to a less degree of influence in manufacturing and real estate activities. Whilst, the least affected sectors are human health, social-work activities, communication and information services. According to the survey carried out by the UK’s Office for National Statistics last May 2020, it has shown that most industries have recorded a 20% and more reduction in revenue during the last two weeks before this survey. Moreover, it has also shown that industries, which reported a 50% and higher reduction in revenue, are: 62% of hotelling and food services, 42.5% of the construction, 37% of wholesalers and retailers, entertainment and real estate and 25% of manufacturing businesses. However, it has reported that less than 7% of health and social work, information and communication services have confirmed 50% and more cut in their revenues. In the global contexts, the situation is not any better, as per the survey carried out by the ACCA, a UK’s leading accounting body, on 10000 members from 100 countries has shown that 40% of respondents have already experienced cash-flow issues, and 80% of respondents expected revenue and profit for this year to be significantly below forecasted. It has also revealed that 60% of respondents have cited a reduction in employee productivities, as due to safety, health and instability reasons.
A close look at COVID poor financials
COVID-19 has hit the working capital of many businesses because of sluggish demand and sudden lockdown. Enterprise working capital that typically includes inventories, receivables, cash and payable, has severely suffered from slow-down and halted production, discontinued supplies of raw materials and parts, a drastic reduction in sales and defaulted clients. Not only have these reasons resulted in sizing down corporate working capital, but they have also weakened liquidity and deteriorated production capacity of any business to reach targets.
On the other hand, profitability that, results from the surplus of revenues after covering all expenses, has been impacted by the COVID-19 too. Business sectors like construction, hoteling and foods catering, transportation, wholesalers and retailers, entertainment and manufacturing, have experienced a revenue reduction as due to slipped demand, and this event has led to losses or drastic drop in profit of enterprises during this pandemic period. As a result, firms have slowed down or halted their operations, terminate or reduce staff cost, control expenses and negotiation creditors to schedule payment. According to a survey conducted by the European Central Bank last May that 15% of responding Euro SMEs have reported a sharp deterioration in profits. Besides, owners have been rectifying profitability through refreshing sales, increasing efficiency of operation, benefiting from the government support schemes and controlling expenditures.
Moreover, COVID-19 has also influenced enterprise liquidity, which grew up from slug working capital and profitability, along with challenging access to cash from banks and investors. According to a recent survey on Euro SMEs by the European Central Bank, it has shown that 18% of Euro SMEs perceived their financial situations as a factor impeding their access to finance. This rough liquidity position will challenge enterprises to pay off creditors, expenses and postpone any capital expenditures to after Covid-19, and ceasing enterprises to grow and reach targets. Since access to finance becomes a problematic issue due to weak financial performance and limited credit facilities, this tripping reason pushes businesses to rationalize expenditures and benefit from available government-backed loans. For example, the UK government, due to COVID-19, provides backed start-up loans of up to £25,000 with a fixed interest rate of 6% per year, and loans up to £5 million to SMEs payable in a maximum of six years.
Besides, enterprise debts indicate repayment difficulty of many firms because of poor financial performance and a gloomy economic outlook of any short-term recovery, driving businesses to encounter risks of default and debt restructuring. According to the European Central Bank survey on Euro SMEs that 30% of responding SMEs have reported a strong negative outlook on COVID impact. Creditors usually support restructuring over bankruptcy as the latter choice will take a longer time and may not result in adequate compensation of debts. Also, lenders still believe that pandemic is a short-term cause and will soon end, and businesses go back to normal. Last, enterprise financial valuation is unfavourable in current COVID circumstances because of lower financial performance and uncertain expectation on future development.
Measures to curb weak financial performances
Within this crucial COVID circumstance and pessimistic outlook, enterprises have taken some measurements to control costs and improve financial performances including, working capital, liquidity and profitability. To improve working capital, businesses need to plan and monitor the progress of every cash-flow account on daily intervals. To manage receivables, you can communicate with clients to understand their pains and forecast demand, along with raising invoices on time and offering early-payment discounts to improve collection. To better handle inventories, you plan stock by giving priority to short-term sale contracts and daily reviewing of market demand to update plans, along with getting closer to supply chains to avoid any disruptive supply or expensive items. Further, you can also run promotions to dispose of slow-moving stock and increase sales. Besides, you can improve payable account by communicating with suppliers and benefiting from any credit terms offered, along with avoiding any unnecessary supplies. Improving cash flows requires weekly forecast and daily monitoring of cash accounts, along with growing sales, controlling expenditures and increasing profitability. Furthermore, you need to focus on raising cash flow, especially from operation by enhancing cash from profit and working capital, along with getting loans, if needed, from the government-backed credit facilities. Improving profitability involves curving up demand or revenues by connecting with clients and fulfilling their compelling needs, along with controlling costs. Last, reducing costs is significant to boost profitability and includes cutting staff costs, negotiate best offers of supplies, encourage remote works and constrict distribution and administration expenses.
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Munther Al- Dawood
Enterprise expert & author
Title: Addressing the financial impacts of Covid-19
Title: Managing business continuity and finance during Covid-19
Title: Impact of COVID-19 on corporate finance activity
Title: The UK financial support to businesses affected by Covid-19
Title: Covid19 a global survey by ACCA, a UK’s leading accounting body.
Title: Survey on access to finance of enterprises in May 2020, covering the period: October 2019-March 2020, by European Central Bank.
Title: The Office For National Statistics- the business impact of cover 19 surveys, carried out in May 2020, the UK.