* What is the financial impact of Covid-19 pandemic and how, companies, institutions and private sector are mitigating the impacts?
The Covid-19 pandemic that struck the world resulted in a sharp decline in the performance of most economic activities. In this article, I highlight the effects of this pandemic on the financial performance of institutions, while explaining the corrective measures to reduce its effects.
The impact of the pandemic on corporate finances:
The pandemic has negatively affected corporate finance activities including working capital, profitability, liquidity, and financing. However, this impact was uneven according to the nature of the activity of each institution, as the activities most negatively affected by this pandemic are construction, hotels, restaurants, transportation, wholesalers, retailers and entertainment, followed by manufacturing and real estate activities.
While the sectors least affected are health, social work activities, communication and information services,
at the global level, it has not changed the situation from that in the United Kingdom.
According to a survey conducted by ACCA, a leading UK accounting body, of 10,000 members from 100 countries, this survey showed that (of the 40% of the sample surveyed) they had encountered great difficulties in cash flow for their projects, and 80% of the respondents expected revenues and profits to drop significantly for this year than expected.
The same source also revealed that 60% of the respondents indicated a significant decrease in productivity of employees due to reasons related to safety, health and job instability.
Now a closer look at the financial indicators affected by the pandemic:
The pandemic affected the reduction of working capital for most companies due to weak demand for products and the repercussions of government decisions to close down most economic activities and markets.
Accordingly, the working capital of the institutions decreased, including inventory balances, debtors, cash and creditors. This is due to a lack of liquidity for customers, a decrease and stoppage of production, a failure in supplies of raw materials and spare parts, and a sharp decline in sales.
This also contributed to weakening liquidity, deterioration in productive capacity and profits, and weak institutional capacities.
On the other hand, the profitability of institutions has also been negatively affected due to the sharp decline in revenues due to the decline in demand. As a result, companies have slowed down or stopped their operations, ended the services of some of their employees, reduced employee costs, and current and capital expenditures were generally subject to control and rationalisation, and the institutions' departments negotiated with creditors to schedule debt repayment.
According to a survey conducted by the European Central Bank (ECB) last May, some 15% of European SMEs reported a sharp deterioration in profits. In addition, company managers took immediate measures to stimulate sales, control expenses, improve operational efficiency and benefit from government support programs, hoping to revive profits.
Moreover, the Covid-19 pandemic affected the liquidity of the institution, which resulted mainly from the cracking of working capital and profitability in addition to the difficulty in obtaining financial facilities from banks and investors. According to the ECB survey, some 18% of SMEs in the Eurozone consider their financial situation resulting from the pandemic a factor that hinders their access to external financing.
This lack of liquidity will also affect the ability of institutions to repay debts and meet the payment of bills for expenses, purchases and growth, and will inevitably lead to the postponement of any capital or investment spending until the pandemic is over.
Due to the difficulty of obtaining external financing due to the weak financial performance of the institutions and limited credit facilities, it has prompted companies to rationalise expenditures and benefit from the available and guaranteed loans from the government.
For example, the UK government is providing financial support due to the Covid-19 pandemic and is providing start-up loans of up to £25,000 with a fixed interest rate of 6% per annum as well as loans of up to £5mn for small and medium businesses payable for a maximum of six years.
Expectations also indicate that the exacerbation of corporate debts resulting from poor financial performance and the pessimistic economic outlook for the future will lead to many institutions defaulting in paying their debts, which may push these companies to face the risks of restructuring, creditors’ takeover, or even bankruptcy.
The European Central Bank survey on small and medium enterprises showed that nearly 30% of European small and medium enterprises (that have participated in the survey) had strong negative expectations about the impact of a pandemic on liquidity.
It is worth noting that creditors usually support the restructuring and acquisition of the bankruptcy alternative because the latter option will take longer and may not lead to full debt compensation.
Also, many creditors or banks still believe that this epidemic will disappear in the short term and companies will return to normal.
Finally, the financial evaluation of institutions is also negatively affected by this pandemic due to the decline in financial performance and negative expectations regarding the outlook for the economy and markets.
Important measures to curb weak financial performance of institutions:
In light of the critical circumstances of the Covid-19 pandemic and the pessimistic outlook, companies have taken some measures to reduce current and capital expenditures and improve financial performance including reviving working capital, liquidity and profitability.
To improve working capital, companies need to plan and monitor daily progress in working capital accounts. To manage debtors, it is required of the project owner communicate with customers to understand their pain, demand expectations, and provide assistance, in addition to following up the collection according to the credit granted and offering cash discounts for immediate collection.
To manage inventory, one must first plan and give priority to materials involved in the manufacture of short-term sales orders, as well as daily review the demand in the market and update procurement plans accordingly, as well as maintain effective communication with suppliers to avoid any delay in supply or price hikes.
One can also run promotions to eliminate slow-moving inventory and increase sales. One can improve the creditors’ account by communicating with suppliers, taking advantage of the granted credit period, and avoiding any unnecessary supplies or purchases.
To increase cash flow, one should plan weekly transactions and daily follow-up of cash accounts, in addition to stimulating sales, controlling expenditures and improving profitability, besides increasing the efficiency of working capital management and benefiting from government-backed credit facilities.
Improving profitability also requires hard work, including reviving demand or revenue, by communicating with customers and meeting their urgent needs, modifying the business model to support the market, in addition to continuing to reduce costs.
Finally, the topic of cost reduction in this critical circumstance is important to enhance profitability and its growth and includes measures such as reducing staff costs, negotiating to obtain the best offers for raw materials and services, encouraging remote work, and restricting distribution and administration expenses.
*Saad Abdulla al-Kuwari graduated in Chemical Engineering from Qatar University and obtained an MBA in Oil & Gas from Liverpool University. He was appointed CEO of Tasweeq in 2010. During his career, he has occupied several key positions in refining projects and processing, oil, gas and refined products, storage tanks and export terminals operation. He also has considerable experience in the field of Gas Processing Operations. He was also manager of Gas, Oil Petrochemical Marketing in QP Marketing Directorate for several years.
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