The world will never be the same again.
Who had thought a month ago that Coronavirus would wreck such a havoc? Nobody. Not even the most pessimist person out there. At the time of writing this article, there're more than 422,829 coronavirus cases reported worldwide. Out of which, unfortunately, 18,909 have lost their lives.
When it comes to business, almost all industries have been impacted. And, some experts say that the impact of Coronavirus on economy is going to more worse than the great depression of 1930s.
Working Capital & The Woes
Businesses around the world are struggling because their working capital is shrinking. And, shrinking fast. Working capital is nothing but the difference between current assets & current liabilites. By current assets, we mean the assets that can liquidate within a period of 12 months. On the other hand, current liabilites are the liabilities that become due within a period of next 12 months.
Working Capital = Current Assets - Current Liabilities
Examples of current assets: Stock, cash-in-hand, debtors balance, cash-at-bank, etc.
Examples of current liabilites: Rent payable, salary payable, short-term borrowings, creditors/vendors balance, etc.
Imagine, you've a brick-and-mortar retail store with the following current assets & current liabilites as on 1st March, 2020:
Stock = $ 10,000, Debtors balance = $ 5000, Cash-at-bank = $ 2000, creditors balance = $ 7000, Rent payable = $ 1500, Salary payable = $ 2000, Short-term bank borrowings = $ 500
So, Working capital as on 1st March, 2020 in the aforesaid case is $ 6,000.
Now, assume a lockdown period of around 1 month. From 1st March to 31st March. During this period, you won't be selling anything BUT you've to any how incur fixed expenses i.e rent, salary & short-term bank borrowings, etc.
The revised working capital as on 1st April, 2020 is $ 2000. That's a sharp decline from $ 6000 to $ 2000. That's called shrinking working capital.
Note, I just calculated shrinking capital for a lockdown period of a month. What if that period is extended for say 2 months. Yes, the working capital will go negative.
Lockdown Vs. Coronavirus
Yes, the Coronavirus pandemic is a human tradegy, first & foremost. Saving as many lives as possible should be the priority. And, that's what most nations are doing right now.
But, the side effect of this lockdown is the looming recession.
Take the following trail into account:
Coronavirus > Lockdown > Consumers stay at home > Business revenue falls > Workers get laid off > Unemployment rises > Recession
And, not to forget the collapse of the banking & financial system as bankruptcy soars. If that happens, then get prepared for the repeat of 2008. Or, may be even a bigger recession than that.
"Economic data in near future will not just be bad but unrecognizable" - Credit Suisse
The effect of recession in 2008 was 10,000 deaths due to suicide. And, the Coronavirus deaths (at the time of writing this article) stands at 18,909. The global Coronavirus mortality rate is 3.4% (as per the WHO). Which of course is high. But, interestingly, the Coronavirus mortality rate in the US is lower (1.45%). This also makes me wonder if the Coronavirus needs different strategies in different countries.
Was Trump right when he tweeted the following? May be or may be not. Only time will tell.
Smaller businesses & companies are going to be the bigger victims of this recession, if it comes. Because they're the ones that have a limited access to credit & low cash balance at bank.
The Domino Effect
The lockdown due to the Coronavirus pandemic has had a domino effect on the business ecosystem.
Consider a brick-and-mortar fashion store. This is how, a typical garments store eco-system works:
Consumers > Retail Store > Logistics > Brand > Factory > Spinning Mill > Farmers
A fall in demand from consumers will have a chain effect on at least 6 other players in the same eco-system.
Mind you, I'm just talking about the fashion industry. If you take the other industries into account, you'll know how big this problem is or going to become one.
And, its not that things are rosy for online retailers. They too are tackling the lack of demand issue. Their eco-system works as follows. When they get affected, they bring down most parts of the eCommerce industries with them.
Ads & SEO > Consumers > Logistics > Warehouses/
Dropshippers > Softwares > Small eCommerce Stores > Brands > Factory > Raw Material Suppliers
You don't need stats to understand that demand is at an all-time low. I mean who thinks about buying a t-shirt during a pandemic.
This reminds me of a nursery poem Ring a ring o' roses - "A-tishoo A-tishoo, we all fall down!".
From the outside, you may think like the media industry doesn't seem to be affected. After all, people are glued to their TV/mobiles & watching Coronavirus news the whole day long. But, what you need to understand is the fact that the media industry is heavily dependent on ads for monetization.
And, if there is no demand & consumer sentiments are at an all time low, why would a company run ads. Yes, until unless, someone is into health or say grocery niche.
The grocery niche has been stable. After all, people need to eat & survive. On the other hand, the health niche is also not that badly impacted. People need to be cured always. However, will someone buy a weight loss course or program during a pandemic?. I doubt.
Due to fall in digital ads, I'm sure the tech giants Facebook & Google would also have taken some hit. But, they're cash-rich companies & a few months of downturn won't affect them.
The hardest hit sectors are aviation, travel & tourism. And, the reasons are obvious. You can expect a lot of acquisition & consolidation deals in these industries. Either you go bankrupt or merge/get acquired by a powerful colleague.
In fact, FlyBe, an UK airlines, was the first victim to go bankrupt & stop its operations on 5th March, 2020. Is it just the beginning? More to come?
Rolex, the swiss watch company, just announced that they shut all their plants & are embracing for a pathetic year ahead. Richemont, on the other hand, another swiss watch company, is offering 49% discount on its items as a special offer.
In India, restaurants are badly hit because of the Coronavirus lockdown. As such, NRAI (National Restaurants Association of India) representing 500,000 restaurants is demanding a financial bailout package from the Government there.
Restaurant suppliers across the world also have been hit by the pandemic. Since restaurants are closed, they're diverting their perishable stock to charities. Some are even changing their business model & focusing on supplying to super markets instead. While a few of them are also trying to register on food delivery apps.
Importers & exporters are also struggling. Importers around the world generally rely on China, the world's biggest manufacturing hub. While the cases in China are declining rapidly & factories functioning at 90% capacity, its the supply chain that's causing the bottleneck. Transportation from factory to port is taking as long as 8 to 10 days.
Exporters, on the other hand, are seeing a decline in orders because most countries are in lockdown phase.
I predict the demand to pick up by May-June this year. A lot will depend how US handles this pandemic.
Again, there's a fear among business owners that the Coronavirus may resurge, you never know. Also, the consumer sentiment will take some more to bounce back. It's not going to be easy.
As Its Happening
I'm an affiliate marketer for a few big companies like Shopify, Rakuten, Partner Stack, etc. And, guess what?. The affiliate marketing earnings have tanked since 1st March, 2020. And, the number of visitors coming to my website is down almost 40%.
Is it just me affected? Are the news headlines really true? Are small business owners really suffering? I digged deeper to find out the truth on platforms like Reddit & Twitter.
Here's what I got.
By the way, as per a recent report, the Corovirus could result in around 5 to 6 million job losses in the US alone.
Plans & Tactics To Counter Coronavirus Recession
There's no point in discussing problems without offering solution.
OK, then here I go:
Protect Your Employees
Believe it or not, but your employees are your biggest assets. With great people on your side, you can resurrect any business. Take care of them in this hour of crisis & assure them of their job safety.
Offer pay cuts. Most employees will understand the situation & agree to the same. But, do not fire the very people who have worked hard to bring your business to where its today.
I know its easier said than done. But, is there a better way out?
Focus on Cash Flow, Not Profit
This isn't the right time to focus on profitability. Instead, strenthen your cash flow. Avoid fancy expenses, save money, collect receivables steadily & pay for vendors.
Maintaining a healthy cash flow (cash received greater than cash paid) should be your topmost financial priority. Everything else will in place as time goes by & demand stabilizes.
Be Proactive With Supply Chain
As I discussed earlier, China is still struggling with supply chain even if their factories are performing at 90% capacity. You can expect the same in your country when the lock down lifts up.
Therefore, follow up with your vendor & logistics provider & make sure that your goods reaches on time. Or else, you'll risk disappointing customers of your already ailing business.
Its no more about online vs offline. Time to get omnichannel. That means you need both online & offline delivery arms for your business.
During Coronavirus kind of lockdown, consumers would prefer online delivery over offline.
Focus On The Needs Of Your Customers
This is the time of rethink about your relationship with your customers. Its time you take their feedback & improve your service.
Needless to say, its ultimately YOUR customers that will decide if your business will stand this crisis. Those businesses who've invested in building a great relationship with their customers will have a better chance of survival. As we say, a satisfied customer is a permanent asset.
Seek Tax, Tariff & Duty Relief
Contact your nearest trade body or association & request them to send a tax relief proposal to the administration or government.
Grant To Cover Employees' Salaries
The trade body should also send a proposal to the government to grant money for payment of salaries to employees. And, I'm sure most trade bodies across the world are already working on it. Still, you can always approach them & pitch your views.
Deferment of Rent & Loan Repayments
Contact your landlord & bankers & seek deferment of rent / loan repayments. I'm sure they'll understand the situation & grant you some relief.
You can also contact your trade creditors & request them to allow credit of a few more days.
Help The Community
During this hour of crisis, we should stand united & help the community. Businesses will start & close down but what will always remain is the support of your community. Always.
Look for local charitable bodies those are doing pioneer work for Coronavirus victims. Donate to them, if you can.
That's it. Thanks for reading.
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