Covid-19 has the potential to be an exponential crisis. It is, from a government perspective, a brutal trade off between deaths and saving the economy. This is a situation like no other, and there is unprecedented uncertainty about what the future will look like and the impact on people’s livelihoods.
Furthermore, many countries are now facing multiple crises – a health crisis, a financial crisis, and a collapse in commodity prices. All of which make for a complicated road to recovery.
Most Governments worldwide have chosen to support households and businesses during these times. However, what does this mean for the economic landscape after lockdown?
Current UK Government’s guidelines mean potentially more deaths and the general consensus is, recession is inevitable. Even more than that, many expect to experience the worst recession since the great depression.
Take a look at the possible exit strategies below. On the assumption that we are able to contain the virus, and the pandemic recedes in the second half of this year, every option still leads to recession.
Now take a look at the very stark graphic below highlighting exit strategy trade-offs and the options available to Governments.
Some of the best sources in the World are very clear about the inevitability of recession and the tough economic times ahead.
This is a truly global crisis with no country spared.
For the first time since the Great Depression both advanced economies, emerging markets and developing economies are experiencing a recession together. Stock markets have plummeted.
Countries that rely on tourism, travel, hospitality, and entertainment for their growth are experiencing especially large disruptions. For emerging markets and developing economies it means unprecedented reversals in capital flows due to currency pressures, weaker health systems and limited opportunity for fiscal support.
The above analysis was undertaken on 6th April.
The table below identifies thinking by the same author, Ian Mulherin from The Tony Blair Institute.
A valuable source of information is The Financial Times. In my view, they have led the analysis of the forthcoming recession and its general consensus.
Both tables below are from April editions.
So what to do?
1.0 80% of surviving the pandemic relates to cash
If you have enough cash reserves to see you through 6 to 12 months, that is clearly a good thing. However, if you don’t (and even if you do), you need to look at ways of building up cash reserves quickly. Check out this useful mind map detailing the range of support available depending on criteria such as business structure and sector.
1.1 Government Grants & Loans
One of the biggest concerns for business owners right now is having enough cash to ride out the storm. Business grants or loans are a great option for any new or existing businesses. With no need to pay back a grant or loan they are an attractive source of funding and the best financial solution for any business.
A full range of governmental support measures have been made available to UK businesses during coronavirus (COVID-19). So it’s important that businesses take advantage of all grants and loans available.
Also take a look at the top 226 small business grants & funding programmes in the UK right now.
1.1.1 Q2 VAT Delay
Due to coronavirus (COVID-19), you can delay (defer) any VAT payments due between 20 March 2020 and 30 June 2020. This is one of the best actions the UK Government has taken for businesses as it provides a significant cash injection. So let’s hope they do the same for Q3.
However, It is important to accrue for the repayment in 12 months time in monthly payments to a separate account.
1.1.2 R&D Tax Credits
R&D tax credits are a great way of generating cash and HMRC says its priority is to keep to its published aim of clearing 95% of SME tax credit claims within 28 days. Therefore, it’s also a relatively quick process. There are plenty of ‘experts’ around to help. Seek advice from two or three companies and trade off their fees.
Make sure you’re abreast of any help available from your bank such as mortgage holidays, loans and credit cards. There’s lots of useful content out there so just ensure you’re fully informed.
Renegotiate your facility with your bank when you don’t need it rather than when you do. For the best rates the time to act is now.
1.2.2 Be aware
Not all offers of help are as good as they first seem. The first government Covid-19 loan for example, is very useful as it is interest free for a while, but it doesn’t get you off the hook regarding personal guarantees the way it was portrayed.The 100% guarantee version is much more satisfactory. Be diligent when looking into your options and make smart choices that are right for your business.
1.3 Clients and Suppliers
1.3.1 Cash Flow
If you can, pay people later and get cash in earlier. Collect any debts owed and consider changing your credit policy as this will have a positive impact on cash flow. Have conversations with your clients and suppliers and negotiate terms in your favour.
1.4 Stock & Inventory
Improve your stock turnaround time and evaluate inventory. When looking at your inventory, you want to observe the volatility of sales. Do you have too much cash tied up in products that sell only sporadically? Would that money be better off used in your “bread and butter” items that turnover more quickly?
You might end up having tons of money tied up in inventory without actually meeting your customers’ needs.
2.0 Sell more; improve margin and reduce costs
There are 3 things any business can do to make more profit: sell more; improve margin and reduce costs. In the current climate you should look to do all three, in fact, in any climate you should look to do all three.
2.1 Sell More
Don’t make any knee-jerk decisions when it comes to your marketing operations during the pandemic. By doing so you can actually create a longer road to recovery. Carefully consider your options and discuss them with your wider team. There are strong arguments to invest in marketing in a recession.
“When times are good you should advertise. When times are bad you must advertise.”
The adage historically has always been right. In the 1920s, Kellogg’s doubled its advertising while Post (Grape cereal) cut back significantly. Kellogg’s profits grew by 30% and they consequently became the industry leader.
In 1973-75, Toyota pressed on with the promotion of their Toyota Corolla and passed on Volkswagen as the top imported carmaker in 1976.
In 1990-91, Pizza Hut & Taco Bell increased their marketing budgets while most competitors cut theirs.
Pizza Hut grew by 61% and Taco Bell grew by 40%, while most competitors dropped 25% in sales.
In 2009, Amazon sales grew 28% following the introduction of the Kindle when they invested in the downturn.
Microsoft and Airbnb were founded in recessions.
In times of economic hardship there is far less competition marketing, which means you will see results not only quicker but probably at a lower cost too. You could be looking at lower pay-per-click advertising, reduced rates and a better ROI.
It is essential that you maintain at least some level of marketing investment throughout the Coronavirus pandemic.
Some of your competition is going to disappear in the coming months be it as a result of bankruptcy or being bought out. This is a business opportunity. The less competition out there, the better your odds of success.
As the world recovers, you’ll experience a growth in revenue and a boost in ROI from your marketing spend.
2.2 Improve your margin
Increase your prices. You want to strike a balance between keeping your prices competitive and fairly compensating the time and effort put in.
At the end of the day, you are a business and your aim is to make a profit. Check out your competitors, in some cases, lower prices can actually make your company seem less qualified. Then, negotiate with suppliers and look at ways of improving efficiency.
It might also be a time to evaluate your clients. Cut low-margin clients, products, or services, and invest the saved time and money in higher producing parts of your business.
2.3 Reduce your costs
Go through everything line by line and look at ways of reducing costs. Streamline your operations and reduce operating expenses. Anywhere there is room for improvement, make the changes. Look to negotiate everything.
2.4 Look at the structure of your business
One of the best tools I know to evaluate and review your business is here. The Value Builder Report. Value Builder | Find out the value of your business in a few clicks. It costs nothing and both provides and enables you to ‘self evaluate’ and ultimately position your business for sale.
It gives a strategic review of your business and areas for you to consider to improve efficiency and structure which ultimately will impact profit and growth. Profit ultimately converts to cash
More significantly it highlights the areas you most need to look at in order to drive that profit.
There are some clear signs that this health crisis will end. Countries are succeeding in containing the virus using social-distancing practices, testing, and contact tracing. So although the general consensus is, yes, we are heading into a global recession, there is light at the end of the tunnel for our economic outlook with the Bank of England expecting “only limited scarring to the economy” over a 3 year period
Make sure you are still around then. Good luck and stay safe!