At the beginning of 2020, the outlook for small and medium-size enterprises (SMBs) was promising. However, the Covid-19 pandemic caused a crisis affecting both lives and livelihoods, leading to a world-wide pause and a sudden and dramatic change for SMBs. Economic markets began to fall, supply-chains slowed or became dismantled and consumption levels dropped. This blog looks at three key issues affecting SMBs and the appropriate considerations to be taken.
1. Cash Flow Management
SMBs unfortunately tend to be at the mercy of others when it comes to cash flow. They likely have thinner liquidity reserves, as they are the largest credit providers to those businesses higher up the supply chain and do not have the negotiating power for prices and payment terms. They also have limited financial alternatives, and mostly rely on support from local banks which will create problems in times of tightened liquidity. Furthermore, in most cases SMBs lack assets that can be disposed of, or that can be used as collateral for new credit lines.
As business activities slow, some SMBs are seeing lower revenue resulting in less cash flow. This issue is heightened by the need to continue to manage fixed recurring costs associated with rent, insurance, staffing/employee pay and commissions, stock or product manufacturing and local/international product shipping.
During the economic uncertainty, managing cash and liquidity positions is crucial in the weeks ahead. Here are a few strategies that businesses can use to offset the impact:
Prepare: Model worst-case scenarios to assess the impact on cash position, and do not be afraid to revise, produce and review cashflow forecasts.
Identify: The financial and operational levers (outlined below) that can be pulled to conserve and generate cash, and potentially increase access to funding.
- Increase the number of transactions
- Increase your prices
- Increase your average transactional value
- Increase the frequency of repurchase
- Increase your accounts payable
- Decrease your cost of good sold
- Decrease your accounts receivable
- Decrease your operating expenses
Assess: Understand and plan for the financial reporting considerations that will result from COVID-19. Many governments have provided support by way of grants, relief from the tax provisions or other local measures.
Customers: Model the changing customer needs and behaviours to ensure that trends are followed.
2. Disrupted Supply Chains
Covid-19 has exposed the vulnerabilities of a reliance of complex global supply chains built on lean manufacturing principles. A decades-long focus on supply chain optimization to minimize costs, reduce inventories, and drive up asset utilization has removed buffers and flexibility to absorb disruptions.
According to the latest McKinsey survey 28% of SMBs doubt their ability to sustain their supply chains. Coping with disrupted supply chains and distribution challenges has meant SMBs spending more time examining the suppliers they work with to identify where the main vulnerabilities in that ecosystem lay. We are currently heading through unchartered waters where the ripple effects are difficult to model and assess, but there are a few things that businesses can do to mitigate and self-guard against further disruption:
Research: Identify alternative supply chain options – this will become more important as new cases appear in new territories. Assess surety of supply and substitution options.
Adapt: Review pricing strategy to ensure supply chain efficiency and support working capital requirements. This agility will see the difference between survive and thrive at the point of recovery.
Manage Risk: Spread exposure across customer and supplier allocation. Ensure that there is not an over-reliance in one area whether concentration in counterparty or region. However, there must be adequate controls in place to manage the risk of onboarding new suppliers.
Technology: Digitizing the buyer-supplier relationship is a fundamental element for building sturdy supply chains and will make identifying and recruiting new suppliers far less time-consuming.
Assess: Reassess key metrics such as lead time and volatility to manage stock levels.
3. Employee Management
A huge surge in unemployment continues to shake the global workforce in the wake of COVID-19. SMBs are more labour intensive than other companies and are therefore more exposed to disruption especially when workforces are in quarantine. There are common priorities emerging for employers as duty of care for their staff. Now is the time for SMBs to focus efforts that support a return to work as best as possible.
Protect: Put in place measures to support employees’ physical or mental well-being, supply of Personal Protective Equipment (PPE), social distancing whether within the office or working from home.
Communicate: With the absence of “in person” interaction, it is important for business leaders to continue to engage with their teams to help them feel informed and supported with responsive, empathetic communication and clarity of policies.
Maintain: Provide appropriate resources and support employee needs to be productive especially as they adapt to working remotely.
Assess: Ensure that adequate analysis is done to balance the potential need to cut costs with the desire to keep people in work. Take the time to assess how business initially responded to the crisis and identify areas for real-time course corrections.
Prepare: The world will recover, and the market is evolving to do so – a smart business will align workforce planning with business strategy to prepare for the opportune moment for growth and ramp up.
While challenges are significant and emerging statistics grim, there is a degree of optimism and perhaps determination from businesses that they will get back on track. Many businesses have risen to the challenges and pivoted at impressive speed to change their business model. Freeing up cash and planning – not just for now but for more prolonged effects of this crisis – is critical for recovery. Reassessing the supply chain and working through or around any disruptions will reduce risk and may have a positive impact on the bottom line. Getting the right supports and communications in place to motivate valuable staff and improve their productivity will aid growth setting the company up to take advantage of recovering market conditions.