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Surviving a Crisis: Coronavirus and Beyond

March 2020

Whether it is the coronavirus, fire or flood, the fact is if you are in business long enough you will almost certainly have to deal with an external impact on your business – bushfires, drought, GFC, SARS, 9/11, we've seen a few. The key is to respond …  but not over-react.

The signs are hard to miss: Empty restaurants and retail stores all evidence of the devastating impact the coronavirus has already had on Australian businesses.

Within a few months, the virus, now called COVID-19, has gone from being a largely unknown medical condition to one that threatens to impair Australian and global economic growth.

Let's explore the impact on business and the importance of planning for setbacks beyond your control.

"This is not a drill," World Health Organisation Director-General Dr Tedros Adhanom Ghebreyesus

It could be months before the virus reaches its peak and an effective vaccine is not expected in the short-term.

For Australian businesses, continuity planning is essential.

Business continuity and planning

Despite a much better result than predicted in Australia's December GDP figures with growth of 0.5 per cent, Australia's economy will be adversely impacted by coronavirus.

The importance of China as Australia's largest trading partner has meant that much of the discussion to date has focussed on China's ban on live animal imports including seafood, and supply-side delays, at least until the Chinese manufacturing sector is able to regain momentum.

But the negative impacts stretch beyond manufacturing. The tourism and education sectors have been hit hard. In 2018-19, 1.4 million short-stay visitors were from China. With travel restrictions in place for mainland China, that number will dramatically decrease. Any business where the general public group together is likely to be impacted either as a direct consequence of infection or out of a simple fear of contamination.

Australia's $30 billion MICE businesses, those in the meetings, incentives, conferences and exhibitions sector, are bracing for the impact of the spread of the virus. Australia is a popular destination for corporate events. However, with a cloud over international travel for the foreseeable future, some events have been cancelled and others in jeopardy in what are rapidly changing conditions. Some countries have imposed bans on large gatherings of people to protect against wide scale contagion, and Australia has introduced bans on gatherings of more than 500 people, which has significant onflows to sports, the arts, and other events.

For others, such as suppliers of basic necessities - manufacturers and distributors of foods with a long shelf life, toilet paper, and cleaning agents - the immediate problem is to ramp up production to meet demand as panic buying sets in, then to manage the inevitable decline when the panic is over and consumers have more long shelf life products than they need.

While panic buying will stimulate a revenue spike and increase profit margins, some of these gains will be counteracted by low demand post the coronavirus panic.

Protecting your business in a crisis

There are practical steps businesses should implement into their business plan. Some businesses make the mistake of not responding at all while others make too drastic a change.

Business continuity planning is vital and it can be challenging. Examples of how your business may need to manage its risks include:

  • Explore the potential end-to-end impact of the virus on your business
  • Define risks and tolerances by product/service type
  • Make informed decisions based on strategic assessments – labour, currency changes, costs of materials and logistics, potential disruptions and supply issues, demand variability.
  • Where weaknesses exist, explore alternatives. Can your business reduce costs as demand falls? Can you increase production to take advantage of demand? Can you adjust procurement to take advantage of or protect against pricing fluctuations?
  • Reduce debt and reassess projections for large investment hungry projects. You might delay a project or speed up time to market.
  • Ensure that your team communicate changes they are seeing and develop a culture of initiative. Your frontline will hear and see impending changes well before management sees them.

An example of an appropriate reaction might be to offload trading stock if it is going out of date soon. But it might be an over-reaction to dismiss staff, when a better idea might be to reduce their hours. Contingency plans should be set in place.

Cashflow is critical in a crisis so it should form a central part of the recovery business plan. Try to have enough capital in reserve to see you though at least three months.

Despite the challenges, there are possibilities

For the businesses that can deal with external threats such as coronavirus, there are huge opportunities. More money can be made in volatile times compared to when things are stable.

If you have a competitive advantage, exercise that advantage. Businesses with limited scale in impacted industries will struggle and some will come onto the market as tuck-in acquisitions.

For others, their customers and suppliers will be open to change if they cannot trade consistently with demand. Opportunities could also arise, such as key staff leaving a competitor or rival businesses losing market share.

To exploit those possibilities, however, it was critical to have a sound business plan to ride out the current turbulence and then move into the next growth phase.

Protecting your workplace and your customers

Protecting your employees and customers from the risk of infection is essential. Organisations such as law firm Clayton Utz and Vodafone have been on the front foot with potentially infected employees and other organisations are being proactive with their staff by encouraging them to work from home.

Businesses should asses the risk of transmission and put the appropriate protocols in place. It could be as simple as distributing the Health Department's guidance and reviewing insurances for staff required to travel.

Individuals who have travelled and are returning to Australia or have direct contact to a confirmed case of coronavirus must self-isolate and should not attend work.

Fair Work Australia notes that, "The Fair Work Act does not have specific rules for these kinds of situations so employees and employers need to come to their own arrangement." If an employee is impacted and needs to be isolated, and cannot work from home effectively, then the time will generally be taken as paid or unpaid leave.

$1 billion to combat COVID-19

Managing the health costs of diagnosing and treating coronavirus is estimated to cost $1 billion. This cost is being met 50-50 by the states and territories and the federal Government. This support will cover health services in public hospitals, primary care, aged care and community health expenditure, such as health related activities in childcare centres.

The Treasurer has also released a stimulus package to protect the economy including an investment allowance, a small business package and a $750 cash payment through the social welfare system.

The Australian impact

Australia's known cases of the virus are changing quickly and with five deaths now reported, the Prime Minister has announced the activation of the Australian Health Sector Emergency Response Plan for Novel Coronavirus (COVID-19).

The World Health Organisation (WHO) reports that both COVID-19 and influenza cause respiratory disease and spread in the same way: via droplets of fluid from the nose and mouth of someone who is sick. WHO notes that coronaviruses do not survive for long on objects such as letters or packages.

COVID-19 does not appear to transmit as efficiently as influenza but causes more severe disease: 3.6% of confirmed cases have died whereas seasonal flue generally kills far fewer than1% of those infected. Unlike the flu, COVID-19 can be contained.

WHO states there is a severe and increasing disruption to the global supply of personal protective equipment – caused by rising demand, hoarding and misuse. Prices of surgical masks have increased six-fold, N95 respirators have more than tripled, and gowns cost twice as much. Market manipulation is widespread. Globally, it is estimated that Pandemic Supply Chain Network supplies need to be increased by 40 per cent.

The Reserve Bank of Australia states that the coronavirus outbreak overseas is having a significant effect on the Australian economy, particularly in the education and travel sectors.

Austrade says that "Media reports of export bans are incorrect - no export bans have been imposed," as a result of the virus.

Travel restrictions

Travel restrictions or increased advice levels are in place for a number of countries.

Travel restrictions are in place for China, Iran, and South Korea. Australian citizens and permanent residents are advised not to travel to these countries. Foreign nationals cannot enter Australia within 14 days of leaving these countries. Australians returning from these countries must self-isolate for 14 days.

Italy is considered "higher risk." If you are returning from Italy and you work as a healthcare worker or as a residential aged care worker, you should not attend your regular work for 14 days.

Other countries are also closing their borders as the sitation continues to evolve.

Consider advice before you take action

 The situation is changing daily and business owners are well advised to update themselves at the commencement of each day and take action appropriately.

As business, accounting, and tax specialists, your accountant is well placed to help you work through the issues around risk to your business and which actions are likely to be beneficial vs not.

Please contact us on 02 9957 4033 for guidance on how to manage your business through this very difficult time.

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Disclaimer

This article is provided for information purposes only and correct at the time of publication. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.

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