Covid-19 – a threat to UK business? How to deal with the impact
As I write this article the number of confirmed cases of Covid-19 in the UK are relatively small. However, the potential risk to business is magnified through a growing paralysis of the economy.
Reduced consumer activity on the High Street will impact many retail businesses and casual dining. Reduced number of persons willing to travel in crowd will impact tourism, hospitality and airline industry. It is likely that consumer spending decisions on future events such as festivals and sporting events will be deferred until the virus has been contained.
Employee absences are likely to escalate and businesses will face disruption from virus related closures. Capacity within businesses will be impacted as a result even if agile working is possible. This could be dramatic if schools are closed, as is the case in some countries.
Reduced imports of raw material and semi-finished goods from countries such as China, Korea, Japan due to the disruptions in their production and supply chain is likely to reduce the performances of the companies who are highly dependent on the imports from these countries and who are not able to move to an alternative supplier. An example of this is China where supplies to the UK which are sea-freighted may cause a delayed supply shortage for any down time which occurred in China as a result of the virus precautions.
Reduced performance of the businesses is likely to crash the equity market. The investors are likely to hold their money into the government securities because of the uncertainty created by the impacts of the virus on the economy.
All of this is likely to impact on UK business, whether or not the virus escalates. The effects are likely to be immediate with reduced footfall by consumers and, in the coming weeks, for production and supply chain failures. The impact is likely to be felt in the cashflow of a business and, for many, will be a temporary setback.
A little like the profile of the virus itself, businesses with no underlying health problems should not fail as a result of Covid 19 related issues. Financial institutions and government should support these businesses. The pressures arising from the virus may be more severe for businesses which have other issues. An early example is the airline, Flybe which was undertaking a turnaround and was vulnerable to the drop-off in passenger numbers.
The virus is expected to be short-lived and, whilst some income will inevitably be lost from the impact of consumers staying away from large crowds, some of the demand will return when the coast is clear. Events due to take place in the summer may be facing a sharp drop in bookings but, if the virus is under control in 3 months, the bookings may come back to normal levels.
The cashflow implications of this could be severe but, if there is a sound underlying business model, it should be possible to get through.
So what should business leaders be doing to protect their business and prepare for cashflow issues? A few suggestions to consider are:
- Assess any possible options for reducing costs in the business to conserve cash
- Assess the cashflow implications specific to the business. Ideally prepare a detailed cashflow projection to model the anticipated impact of any issues
- Starting to communicate with the existing financiers at an early stage to anticipate any issues
- Start to explore short term funding solutions to meet short term cash flow needs determined from the projected cash flow model
- Explore other options of financial restructuring and operational restructuring to reduce the impact of these risks on their financial health
Other areas to consider are insurance cover and contract terms. Business interruption insurance cover is available to businesses but, for some policies, the Covid 19 may not be a trigger event for a claim. The government’s definition of Covid 19 as a notifiable disease on 5 March may help businesses to make claims so it is advisable to speak to an insurance expert to explore any possible claims.
There is also the possibility that “force majeure” clauses in contracts may be invoked which could protect businesses which cannot perform under contractual terms due to the impact of the virus. Exploring the details of this is beyond the scope of this article but legal advice on the point would be advisable.
Ultimately, if a business is facing cashflow difficulties which cannot be resolved through other support routes, more business rescue strategies may be needed and these will need the input of restructuring specialists. Hopefully government and business stakeholders will provide sufficient support to avoid any such measures being necessary.
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