Finance and Coronavirus 2019

Introduction

The economic and social impact of Coronavirus Disease-2019 (Covid-19) will be felt in every company department and operating area. Externally, it has already influenced the markets you serve throughout the entire value chain. It will have both macroeconomic and microeconomic consumer influences on corporate sustainability. In order to successfully respond companies will need to modify their objectives, strategies, and financially-social implementations.

There will be a need to redefine the most important corporate value-building milestones. This will be required for dealing with sales, production, new product development, operating processes and the engendered marketplace financial disruptions caused by Covid-19, as well as any future pandemics. Companies will need to move with dispatch to adjust for the new market realities, evolving internal and external cost structures by developing more effective hedge strategies implementations that use better predictive financial and market metrics.

The Finance of an Emerging and Post Pandemic Society

Covid-19 is both a shock-and-evolutionary market event. It should create opportunities for greater financial operating effectiveness using adaptive hedge strategies in a world where pandemics can breakout at any time. These strategies should be tied to important economic indicators such as increases in employment, consumer spending, bank lending, as well as short term liquidity and interest rates. Turn around employment numbers must reflect real increases in payrolls together with the quality of employment, and not just inflation. The CPI and other consumer confidence indicators are bellwether signs of how confident companies should be in their sales forecasts, capital spending, and budgeting processes. Understanding economic indicators help with forecasting growth, cost management, and understanding market movements.

Pre-Covid 19 major capital purchases will need to be rethought. The number of “stay at home” employees, operational redesigns, and channel changes suggest the need for new strategies to sustain revenue . A contracting economy does not just put downward pressure on revenue, but it also changes the cost and market structures to generate that revenue. International companies will witness structural changes that will be reflected in increased insurance cost and the currency exchange rates . Economies that open up first will have market and currency exchange advantages over slower recovering economies and businesses. Slower Covid-19 recovering economies could exhibit inverted yield curve behavior, negative interest rates, and higher exchange rates straining market liquidity and prompting the need for increased government intervention. Slower recovering strategic companies could present acquisition opportunities.

The influences of government and social interventions have already changed consumer and financial markets. This can be seen in new consumer buying behaviors and attitudes toward product and service suppliers, as well as delivery services. Other effects have been the increased number of corporate bankruptcies, costly changes in the distribution channels, and vendors struggling for liquidity.

The reality is a pandemic recovery will not be easy or quick. Some suppliers will be missing, while others will struggle for liquidity. The imports are that companies with customers will need to adjust their marketplace and financial strategies to achieve the newly defined corporate objectives.

The New Market Realities

The new political and market environments will make it a challenge to do business, as finance and social eco-systems collide. International customers will have their own new rules for buying and selling. The number of new State and Federal virus-related mandates will drive operating cost up. Some local governments may offer guidance and relief for companies trying to navigate local market realities. Customers and vendors will need to comply with their individual state, national, and international mandates. This can lead to a stronger demand for local businesses to supply goods and services giving them a competitive advantage (Porter, 1998) over non-local suppliers. Companies can be competitive with investments that maintain local market momentum. Adjusting for the new market realities will reward the most agile. The presence of environmental agility can be evidence by empowering employees to act entrepreneurially, reallocate costs to higher valued activities, retune existing products, lead with new products & services, and finding more innovative ways to reach post-pandemic customers at a lower cost.

A slow economic recovery should be anticipated. The economy will not come roaring back even with a Covid-19 vaccine. Companies will want to re-evaluate their legal liabilities and assets starting with customers, vendors, employees, service and products, as well as IP given the pace of recovery. A fresh look at how revenue, profitability, and cash enters then circulates through the company should be done by financial and accounting management. Companies do not generate revenue, profit, or cash. These are generated by the markets that companies compete in. (It is often surprising to hear how many employees believe that companies give them a paycheck; and paycheck comes from the Company. Paychecks come from collected sales/AR (cash investors, donors etc.) from the outside i.e., "the market". Companies incur costs to gain access to these resources.

Current Covid-19 market research suggest that customers and vendors have changed their consumption behaviors, attitudes, and acquisition processes. These will affect both revenue and cash flow. Traditional expenses once supported by (the pre-Covid-19) markets will no longer be acceptable. This means companies will need to change their cost structures starting with employees to match the market conditions. If the market won’t pay for it, then get rid of it. While it can be debated what employees generate, their costs should not be debated. Employees generate costs with certainty. Cost is the expenditure of resources to achieve an objective. Resources spent without achieving the objective is the definition of waste. Every industry has a basic cost structure. The finance and account executives should help management to better understand the new Covid-19 market’s cost structures.

New cost structures require revisiting a company’s (products, services, packaging, marketing, customer service, administrative overheads, etc.) costs to be in its market(s). A slower economy may not support the once celebrated flagship services and products. In many instances there will be no need for fork-lift products and services upgrades. Companies can determine whether: 1). new uses, 2). more uses, and or 3). different uses of existing products and services (Kotler, 2010). These strategies can reignite sales and point to the degree new investments in innovations will be required. Even new environmentally-social packaging has the potential to rejuvenate sales.

New cost structures are an opportunity to develop new pricing models and strategies that support profitability and ease of market penetration. Additionally, companies will need to more tightly focus on worker cost effectiveness, and not efficiency. Do not confuse at-home worker efficiency with workplace effectiveness. Efficiency is doing the right thing, while effectiveness is doing the right thing correctly (Drucker, 1986). The slow market recovery together with newly emerging markets will place an acute strain on corporate cash flow. Financial executives should have a tool chest of available approaches for increasing cash flow for their companies. They should not overlook the potential that pricing can be the innovation that increases cash flow and allows sales to recovery then thrive in the new economic-social environment. Finance and Accounting executives should provide the management team with the type of entrepreneurial leadership that expands market share, and not just one more "numbers-based-report". But rather a true financial management MD&A with new stress-test metrics will provide companies a clear path forward. By looking beyond cost-plus and competition pricing models, finance can develop more effective value based pricing that brings back customers, as well as pioneer new markets.Finance and accounting have to assess the goodness of their processes, tools, and reports for their predictive values.

Value-chain participants that companies once relied on pre-Covid-19 are likely to have been weakened from dealing with their own new regulations, social issues, and lack of liquidity. While the big-name suppliers have captured the bankruptcy headlines, many of the mid-size and smaller channel distributors have suffered financially as well. It can be anticipated that manufacturers and distributors (VARs, VADs, Wholesalers, and Retailers) will have new cost structures. However, finance-and-marketing teams can remodel channels to develop more effective and innovative ways to reach customers with less cost. It can be anticipated that an increasing number of B2B value-chain participants will migrate to online purchases placing a new strain on delivery systems. Companies will need to leverage existing delivery systems, while investing in new delivery infrastructures to reach customers. Market disruptions are opportunities to innovate and taking over the marketplace leadership role.

The new social, environmental, and health conscious companies are likely to reap the rewards in costs, employee confidence, and customer preference. Positioning the company as an established firm with health-conscious high valued products and services may require repositioning the company and its message to reach customers. The only real competitive advantage a company has is its customers. Without customer no company can survive. Influencing customer’s new economic-social behaviors will require having an innovative Marketing Communications (Marcom) program with a compelling message. Marcom is all about influencing market (i.e., consumer) behaviors. Companies should not look past the use Marcom to create post-Covid 19 demand-pull for their products and services. Marcom can revitalize product lines, energize employees, and influence customers’ buying behaviors. It can have a significant positive financial impact on the company’s bottom line, balance sheet, and new social acceptance.

Financial Implications

Finance in its most basic form is a discipline and process by which good economic (business) decisions are made. Companies ignore the new economic behaviors and financial impact of Covid-19 and any future pandemic at its own peril. The current and post Covid-19 situations have made the practice of financial decision-making, behavioral, and risk management central to creating a balance sheet that can survive a pandemic. Strategic financial issues include the myriad of changes in operations, the ability to forecast, liquidity, and availability of capital resources to improve outcomes. The merging of postCovid-19 corporate finance, behavioral finance, and new social behaviors will change corporate strategy implementations. Hirshleifer (2020) noted that new models in social transmission bias in economics and finance are likely to be present given our Covid-19 environment today. He suggests new consumer preferences and economic behaviors have emerged as a result of the pandemic. These behaviors and attitudes are likely to change financial outcomes.

Post Covid-19 financial strategies will require a renewed look at risk. Risk can be defined as the uncertainty of outcome. The new uncertainties will require department specific hedge strategies. Risk management implies that the uncertainty can be managed or eliminated. It cannot. Risk can only be hedged. The management of risk assumes that one can control the process or situation well enough to measure it. Further, we assume that because we can measure something we can control it. These are false assumptions. As longs are humans are involved in processes then markets will be a challenge to control. There will always be challenges to measure, control, and management. This is why companies will want new hedge strategies that account for economic-social influences . Handing management basic financial and accounting summaries, variance reports, ratios analysis, and chart metrics will be insufficient to navigate the current and future pandemic business environments. Finance will need to work internally with management and external with markets to implement new balance sheet "stress-tests"; as well as provide the leadership for building new post-pandemic corporate economic value.

New consumer attitudes and distribution channel behaviors are the results of the global response to the pandemic and its disruptions to life, socializing, and economics. These disruptions have also affected worker productivity. The importance of worker socialization cannot just be swept away with regulations after thousands of years of evolution and practice. The financial impact human workplace socialization is still evolving. Some companies are experiencing decreases in stay-at-home worker's productivity, worker positive attitudes and company support. The impact of new social-economics is likely to result in the increase of COGS, operating expenses, less profit, and a dwindling supply of cash. Accounting and financial management can mitigate these effects with more sensitive financial-social models and salient synthesis. These processes can lead to better corporate hedge strategies that will allow for improved financial sustainability.

The emerging and post-Covid-19 financial institutional markets are already developing better risk management tools and processes for companies seeking growth capital. Even with historically low interest rates banks will spend more time assessing a company’s existential risk, not just basic reviews of profitability and cash flow financials. Lenders will need to understand a company’s full cost of doing business and marketplace disruptions. Examining a company’s leverage, credit rating, and free cash flow will prove insufficient to characterize lending risk. Banks will want to understand how its new financial metrics and risk management programs will predict outcomes. Banks are likely to requiring more assets from customers to meet liquidity and cash flow ratios despite having a lending surplus. IPOs and major equity markets will reflect investor behaviors beyond herd instincts (Bikhchandani, Sushil & Sharma, Sunil, 2001; etc). Any projections will be met with more than the usual level of skepticism. Still, companies will want to financially retool to get out of expensive debt-related contracts and project financing to increase its cash flow using the historic low interest rates. These approaches work together to lower operating risks and build the balance sheet's critical reserves.

Summary

Finance must provide energizing leadership throughout the company in our current and post pandemic era. The new economic component is the level of required social interaction to support financial objectives. Additionally, new corporate risk-management programs must include disruptive hedge strategies. In truth, every corporate operation should be hedged; not to do so is malpractice. Leading the company through this and future pandemics will require financial-social entrepreneurial leadership. The frustrating part may be navigating the economic-social aspects of a pandemic corporate life. The financial and operational impacts of a pandemic can lead to the tragic consequences or represent an opportunity to take over the leadership of newly emerged markets with a stronger balance sheet. By re-evaluating the strategic assets, there are opportunities to redeploying them to a higher (economic-social) value by being an innovative entrepreneur. Drucker (1984) noted that entrepreneurs are individuals that redeploy assets to a higher-value (in a changing environment) and isn’t that what management, shareholders, financial markets, and customers want.

-Hiram Willis, Ph.D. Finance