Businesses Need to Prepare for the COVID-19 Downturn
At the time of this writing, there have been more than 200,000 confirmed cases of COVID-19 around the world. Governments are implementing lockdown procedures. Businesses are reeling. A global recession is almost a certainty. In fact, on March 17, economists from Morgan Stanley and Goldman Sachs, respectively, made the call that the world’s economy was already in recession.
Crain’s Detroit Business has reported that the recession is likely to hit Southeast Michigan particularly hard, citing the region’s heavy reliance on the automotive sector, which is expected to be badly affected by the crisis. On March 18, Ford Motor Company, General Motors, and Fiat Chrysler announced plans to close all U.S. factories, which will send shockwaves through the supply chain.
Our region, and our country, have been through difficult times before and emerged stronger from the experience. The Great Recession, precipitated by the 2008 financial crisis, was deep and painful, but in a few years’ time the economy regained its footing. In many ways, this one feels different. There’s no historic corollary, at least in most of our lifetimes, that serves as precedent to help anticipate what to expect next. But one thing is certain—businesses must take immediate steps to ensure they are prepared, as best as possible, to survive this crisis.
During the last 20 years of providing corporate restructuring counsel to distressed businesses, I’ve witnessed the differences in outcomes experienced by companies that take bold, aggressive steps to ensure their survival during a downturn and those that don’t. Here are some of the issues that your company should be focused on and steps it should be taking now.
Increase liquidity. Companies will need cash sufficient to survive, which means tapping credit lines before liquidity dries up, and divesting non-core assets to provide needed cash at prices higher than may be available in the coming weeks and months. In 2008, Ford put up all of its assets as collateral to raise funds, which enabled it to stay out of bankruptcy.
Protect your supply chain. Plan for certain of your suppliers of parts and services to fail, or at a minimum experience disruptions, moving forward. Assess and identify critical parts and services, particularly those that come from a single-source supplier, and make contingency plans to ensure continuity of your supply chain.
Review the financial health of your customers. In every economic downturn, one of the ways that companies try to conserve cash is by delaying payments beyond contract terms. Audit the financial health of your customers. Be diligent about enforcing payment terms. In some cases, amend payment terms to cash on delivery. To the extent your business is experiencing liquidity issues, consider approaching certain of your customers to determine whether they will pay you more quickly.
Review insurance policies. Determine whether your existing insurance coverage is sufficient to protect against downside risks. Coverage for business interruptions and supply chain issues is particularly important in this environment, although there are questions as to whether damages due to COVID-19 would count as a covered loss.
Review commercial contracts. From event cancellations to breaches of supply agreements, COVID-19 is forcing companies to make difficult decisions leading to terminations of business relationships. The long-term ramifications of those decisions will be sorted out in a rash of litigation in the future. For now, review your commercial contracts, especially “force majeure” clauses, to determine what flexibility you—and your counterparties to contracts—have regarding contract performance.
We are in uncharted waters. In times such as these, it’s critical for companies to be hyper-zealous in order to survive.