Big businesses are facing big problems as they grapple with the Covid-19 pandemic that is hitting economies around the world. Stock markets are falling, countries are in lockdown and China, the manufacturer of so many goods for global business, is only now returning to some form of ‘business as usual’.

According to a recent ACCA report, an extended and significant slowdown in the Chinese economy would reduce world GDP growth and reverse the recent stabilisation in global trade volumes. An interruption in global supply chains caused by extended factory closures is the biggest risk to the global economy.

The report adds that within Asia, Vietnam, Taiwan and South Korea are particularly vulnerable. The major virus outbreak in South Korea itself adds to supply chain concerns: Samsung, the world’s biggest producer of smartphones and computer chips, is at risk of suffering disruption to its output. Elsewhere, European carmakers could be affected too, but so far have not reported interruptions to production.

At the same time, a fall in consumer demand in China, and the virtual absence of Chinese tourists around the world, is having a significant impact on the global economy. Although the ACCA report expects economic activity to pick up once the outbreak has settled, the risks of a prolonged crisis have increased in recent weeks. A rise in business failures and job losses, for example, would further depress output and extend the economic damage well into the second half of the year.

‘For larger business, it is very hard to predict where it will go, so therefore action will be based on a range of scenarios that will be constantly refined,’ says Clive Webb, senior professional insights manager at ACCA. ‘The nearest frame of reference is the 2008 credit crunch, which is comparable in terms of downturn and market reaction, but this is not where businesses and technology are now.’

Webb is seeing large businesses looking at more flexible ways of working and believes it is now a time for innovation from the human resources functions. ‘It is another wake-up call for digital working,’ he says. But he warns that more employees working remotely will place strain on a business’s network, as well as raise cyber security issues.

At the same time, he urges businesses to ensure they have robust resilience plans in place. ‘If you have a plan, follow it. If you have no plan, you will be in crisis mode.’

Understanding your vulnerabilities

As a first step, Webb advises businesses to establish the impact on cashflow and the balance sheet under different scenarios. ‘You need to understand where your vulnerabilities are. There is always a consumer at the end, and if there is a downturn in consumer demand, there will be a ripple effect. You need to manage cashflow, funding, reserves and liquidity solutions.’

Webb also urges large businesses to review their supply chains to identify weak points. ‘But this is not an excuse to be hard on small businesses, he warns. ‘It is no time to say goodbye to your suppliers,’ he says.

The good news is that a number of central banks have acted to reduce interest rates, together with a relaxation of capital requirements, which will give lenders a degree of headroom when supporting businesses.

‘Businesses should produce cashflow statements for the next three to four months, modelling them against a 25%, 50% and 75% drop in demand,’ says David Hutcheson, managing director of Glen Abbot, a business continuity consultancy. ‘It is very important that they have in place clear financial statements which tell them where it is going to bite worst. This will then allow them to think about where they can cut costs now.’

The human factor

Hutcheson, who specialises in the impact of pandemics, points out the need to address employees concerns early as well. ‘You need to make sure you have the correct HR policies in place, together with frequently asked questions, to cover areas such as school closures, critical workers and extra pay, because this initially is going to be a people problem.’

He adds that businesses should also have in place a clear policy about what they will do when the first employee says they think they may have the virus, and then what they will do when the first person actually contracts the disease. This may be different depending on location and the country within which the business is operating, so advice should be sought from the relevant health and government authorities.

This human element cannot be understated: ‘Before giving advice to clients, my partner and I needed to look after our own staff first,’ says Rosanna Choi, partner at professional advisory firm CW CPA in Hong Kong and chair of ACCA’s global forum for SMEs.

Choi asked her administration department to do preparatory work such as the procurement and distribution of sanitary supplies, carrying out disinfection of key sites, strengthening inspection and health protection, reporting relevant information on a timely basis, and medical observation and quarantine measures for those who had come from or had been to the key areas of the epidemic.

But even these measures might not be enough if your business is in an area that has been effectively placed in lockdown. John Kam FCCA, who runs a Chinese supply chain advisory service describes a situation in China where businesses were closed for nearly two months. ‘People who were working in these businesses received half their salary, which then led to a reduction in purchasing power,’ Kam explains. ‘Theatres and cinemas were also closed. The service industry depends on labour from other areas, and the sudden drop in mobility affected many businesses.’

However, Kam adds that the Chinese government at national, provincial, municipal and district level was able to provide many levels of subsidy for struggling businesses. These included help with tax relief, social security and business loan relief. ‘The state effectively became a business guarantor,’ he says.

Consideration should also be given to ongoing disruption that can occur even as local economies return to normal. Supply chains may have been disrupted, equipment may not have been maintained, and there will be people issues. As Hutcheson says: ‘You need to work out how you will bring them back into work, especially after they have been working from home – there needs to be a communications plan in place that will engage and update employees regularly.’