The Unknown Unknowns: Preparing for the Future of Business During a Covid-19 Pandemic
Credit: Donald J. Sauder, CPA | CVA
Written in 1742, one overlooked masterpiece from the most underrated century of English verse, Thomas Gray’s poem “Ode on a Distant Prospect of Eton College” concludes “And happiness too swiftly flies. Thought would destroy their paradise. No more, where ignorance is bliss, ‘Tis folly to be wise.”
The business world has changed since 1742, and so has the North American continent. Yet those timeless words still resonate today as a masterpiece. With the Covid-19 pandemic rapidly shifting reflections on both the macroeconomic and microeconomic landscape of business, entrepreneurs are increasingly likely to be entering an era where the business unknown unknowns are more evident than ever before. While ignorance is bliss, ignorance also has risk.
In recent decades, with a firm reliance and trust in the management of the US economy and economic policymakers, entrepreneurs have had an unparalleled opportunity to develop enterprises. The sunny business climate of past years has provided the best of resilient opportunities for enterprising entrepreneurs.
Approaching the new planning horizons of the Covid-19 business climate realistically, when we consider the reality that now we have a new classification of enterprises – essential and non-essential businesses, it should raise awareness that these quick shifts in trends and the business climate are likely not simply temporary. Today, for some businesses classified as many non-essential companies, strategic planning is merely a viable survival plan.
Too many businesses with aggressive growth strategies often fail to appreciate that business growth requires capital and access to capital financing; ultimately, growth involves a corresponding amount of cash. Companies that have continued to aggressively gain market share with the simple assumption that funding will always be available whenever needed should cautiously consider shifts in regulated lending practices and credit policies amidst a Covid-19 pandemic. Bottom line: Don’t pursue business growth if your financing funds are not assured.
Easy financing access in prior years has been a plain and straightforward vehicle that can transport any entrepreneur farther than they planned to go on the highway of commerce. The assumption, all risks are financeable in some fashion, is a truism until it isn’t. Perhaps you’ve never considered the fact your bank could get in financial trouble?
History tells us that companies confront financial trouble more often from a lack of cash flow than a lack of net income. This is no more apparent than when inventory is sold, and payment collection on contracts or accounts receivable is deferred because your customers are under financial duress. Increasing risk is supply chain disruption with just-in-time inventory margins, and the supply chain unexpectedly tightens. Too often, business owners are overly optimistic or unrealistic about real underlying micro and macroeconomic trends, hazards, and tensions, leading to unnecessary risks.
It would seem to be a reasonable expectation for many individuals, that Covid-19 pandemic business risks will perhaps last beyond the 2020 business year. For this cause, having a plan and cash equivalent reserves to continue to comfortably cashflow term debt and fixed expenses among variables in cashflows, is most prudent.
Envisioning what these Covid-19 business changes will look like in say even six months, would be folly for us to prognosticate with any credit as an expert. Plainly, we don’t know what we don’t know, and we don’t know what the unknowns are. On the contrary, considering possible business climate change and pandemic scenarios is advised.
The foreknowledge of the right business decisions in 2020 will only be known after the fact, and many necessary business decisions will be made with less than complete and perfect information. The words “Welcome to business speculation” should bring a degree of realistic awareness to current Covid-19 pandemic risk(s). Business leadership today must be increasingly decisive, and not be influenced by fear and concern.
If you’re a business leader and you’re fearful today or have more risk than you can handle or have prepared for, you know what you need to do. Begin immediately downsizing your enterprise risks. If you need help with this task, retain a trusted advisor. You are now aware that you exceeded your comfort zone of feeling appropriately equipped to navigate an economic storm. If you lack the necessary confidence both for yourself and those who look to you for business leadership, the voyage is unadvisable with your charted course. Do you see the lighthouse keepers? (More importantly, can you discern like a certain Apostle when you should be in the harbor?)
Many business industries are solely dependent on credit market access. In real estate, most buy | sell transactions, and more substantial construction activity is associated with loan financing. The real estate’s current and future value is pillared on the assumption that someone else will be able to access credit to purchase the property when the owner desires to sell.
The domino effect of the credit market reliance is the chief concern we need to consider for business strategy developing Covid-19 business plans. Instability in financial markets, and therefore credit markets, are a trusted forerunner of microeconomic business crisis developments.
When interest rates are near zero, it signals a leading indicator of the future value of that money. When interest rates are negative, banks will also be less likely to lend if they don’t pass on the additional costs to those customers who borrow. Correspondingly, the price to access credit can increase. It is not unrealistic to suppose fees can be placed on lines of credit and other financing sources. What would it look like to have to pay your bank a 1% or 2% fee simply to keep your business line of credit from being closed (without any amount drawn on financing)?
Restructuring balance sheets should be of top priority for businesses that want to avoid a potential risk of insolvency when counting the costs of a possibly longer-term planning horizon than expectation from a Covid-19 business climate. This includes downsizing inventory to pay off debt(s) and increasing equity either with additional capital or strategic downsize planning of the balance sheet. Paying off debt is the objective. When financing insolvency, financing experts will tell you that the last dollar of financing is the most expensive and may be too costly in business recovery.
Planning horizons should include all possible scenarios your team can think of with regards to risk including such things as a business shutdown or an off-line team. Events could occur for any number of reasons. Additionally, suppose government resources become strained and for peaceful discussion purposes a possible insolvency of local municipalities. In those instances, judges could rule that the property owners will make up the deficit in revenues. From a microeconomic perspective, when a homeowner’s association faces revenue deficits, who pays? (The appraiser thought those condos were worth $1.0m apiece, and now listed at $75,000 because costs rose to $5,000 per month payable to the HOA?) Or say real estate taxes doubled for any number of reasons, what would that do to local household budgets and, therefore, your customer’s discretionary revenue?
We are in a season when there are no perfect business decisions, and knowing the right choice is impossible to discern when complete information is absent until after the fact.
A business chief risk officer is increasingly vital to enterprise successes in a Covid-19 pandemic. If your business omits a meeting to assess Covid-19 business risk(s) regularly, you’re unprepared for the unknown unknows ahead. You should quickly be more diligent before it is too late. At a minimum, you should meet to examine and discuss pressures among other industries, resolutions, precautions, and plans to resolve potential tensions if they should reach your trade or enterprise.
Develop a list of the ten best events that could happen to your business, both during and absent a Covid-19 pandemic. Also, develop a list of the ten worse events that could occur, i.e., shutdowns, cashflow interruptions, or supply chain breaks.
After you successfully outline these twenty events, and develop workable and implementable solutions, you’ll be further prepared and ready for the future Covid-19 pandemic business unknown unknowns that may be encountered ahead.