By: Linda Sherlock, Executive Head: Wealth and Business Development at PPS
In business planning, the certainty provided by risk mitigation is everything. This is why companies and professional practices have turned to solutions provided by financial advisors for a number of years.
Mitigating against the unexpected
Sometimes risks occur that no one could have foreseen. What about these global scale events, which disrupt not only businesses, but throw the entire financial infrastructure and nature of doing business into disarray and uncertainty? How does one mitigate against the unexpected?
After many years of risk characterised by the 2008 global financial crisis, recent downgrades by Moody’s, Standard & Poor and Fitch rating agencies and more, the last thing the world was prepared for was the Covid-19 pandemic and the new risks and costs of doing business during lockdown.
Large businesses in particular are suffering during this time. Although much attention – and financial aid – has been given to SMEs, there has been little to no relief provided for bigger businesses. These bigger businesses are grappling with higher overheads, anxious shareholders, the livelihoods of more staff and their families resting on their shoulders.
The offshore problem
To make matters even more complex, many larger companies are also suffering fallout due to having offshore investments. For many years, the volatility and geopolitical uncertainty in South Africa meant that it made sense for many businesses to have significant offshore exposure – never once imagining that uncertainty worldwide to this degree could eclipse the uncertainty locally.
Now, business owners and investors are looking at their portfolios amid the financial bloodbath that is COVID-19, stuck between impossible volatility both offshore and at home, wondering what to do.
What to do
If it’s an SME
When in doubt, cut expenses. SMEs may consider disposing non-income generating assets to improve their cash holding, with great results. Going the loan route should be carefully considered as these come with interest charges even if repayments are frozen during this time.
A lack of good cash flow is particularly dire in uncertain times. For this reason, SME owners can also consider changing their investment strategy by adding short-term low risk investments to their portfolio, which enhance liquidity, and negotiating extended accounts payable periods with their suppliers.
If it’s bigger than an SME
The lessons to learn in this time go far beyond a single pandemic. Here, we unpack how to downsize risk – the large-scale disruptive risks no one sees coming – depending on the size of the company through business assurance.
Desperate times call for greater liquidity to pivot as the going gets rough. The good news is that larger companies are better equipped with dealing with liquidity risks than their smaller counterparts. Liquidity risk is the inability of a business to service its short and long-term obligations, which affects its solvency over the long-term and liquidity over the short-term. With the current outbreak of COVID-19, short-term liquidity is one of the biggest risks facing business owners.
In terms of offshore exposure, businesses should seek out solid financial advice from a professional well-versed in investing during times of high volatility to see if their portfolio weightings should be changed.
Furthermore, there must be protection through business insurance. Insure short to medium-term risks like the loss of a key person, while also putting in place comprehensive business interruption cover and adequate cybercrime cover, as some industries have noted a rise in cyberattacks during this time.
Factors to consider
Ultimately, the better the risk mitigation is, the better the business will weather the COVID-19 storm or any major unforeseeable events. Business planning and sufficient risk mitigation strategies consider:
- valuations and cashflow management
- comprehensive business needs analyses
- appropriate business mitigation strategies and solutions
- tax obligations
- insuring the insurable risks where possible, for example, insuring the lives of business owners who have stood personal surety for a loan to the business.
Other than risk protection and mitigation, a financial advisor can assist the business, its owners and employees in preserving and growing wealth through the use of appropriate retirement and investment vehicles.
Some businesses do not have access to top-of-the-line lawyers, financial instruments and plans or cash flow experts and many feel it’s too late to start structuring a business plan now. But that’s not the case. Today there’s COVID-19 and downgrades, and we don’t know what tomorrow holds.