Matt's Frequency Series (Opinion) - What Does COVID 19 Mean For You and Your Business

A further outbreak of COVID 19 was inevitable, whether the old variant or a new one. There is talk that we have had a golden run from our first lockdown in 2020 lockdown till now, and that that golden run is over.

We started out to flatten the curve, and then pivoted to an elimination strategy leaving the curve flattening as plan B. Now it seems elimination has to be abandoned at some stage and we have not yet done enough since lockdown 1 to flatten the curve.

You will remember that flattening the curve was about not overwhelming our medical facilities, and especially our ICU facilities.

I’d like to refer to two recent articles as a background to what this might mean to you.

In the first, Michael Riddell looks at the huge economic costs that “lockdown 1” brought on us last year. Ever a dry character Michael then looks at what we might have done to prevent lockdowns, and how by taking a disciplined economic approach we might have been prepared to spend quite a lot to avoid doing that again. Basically, he says every week of lockdown costs the economy $1.6 billion. I guess we need to take that in lumps of three or four weeks to allow for clusters to bloom, contacts to be traced, things to stabilise, and lockdown levels to slowly retreat.

On that basis you could easily say each event is a three week one and each event costs NZ $5 billion. Getting insurance for that is harder than getting insurance for an old tower block in Wellington so we are left with prevention and mitigation as our options. Anyway, if you want to read Michael’s entire take you can do so here.

In the second article, the Newsroom looks at how the public officials have repeatedly avoided stepping up to building tracing capacity and kept their accountability woolly between cases and contacts. I guess you are only as accountable as you are held accountable. You can read the Newsroom article here.

To a certain extent this all has the benefit of hindsight. We did however have the benefit of our own recent experience from last year’s lockdown 1 and all the international experiences. Whatever stance you take on that, all these issues, they have a very real input into the discussion about where-to-from-here.

We have an international reputation for having a great Prime Minister who has excelled in disasters.

Looking back, you can see a difference between managing a discrete disaster that has largely all happened already and managing an ongoing crisis. That is useful for us to recognise as business owners.

I think things changed around COVID sometime after the end of May 2020. We got through the initial period. The government did initiate a lockdown, they explained it well, and they threw money into wage subsidies to support workers not able to earn. In short, the government reacted well and maintained our confidence in both the economy and our leaders. Our present asset prices are a much preferred problem over the possible 30% unemployment a crisis in confidence might have brought about. Well done.

It also seems clearer that the first two disasters (Christchurch and White Island) were discrete events with largely predictable immediate responses from emergency services. Those largely happened without any input being required from political leadership. Never-the-less they were handled well and that is to be applauded.

From the start Lockdown 1 had a different flavour to it. We were facing the unknown rather than the unthinkable but done. We could also see with dismay how the issue was being dealt to around the globe. It wasn’t a discrete disaster that had happened, it was an on ongoing crisis.

In the extended period since lockdown 1 there have been a number of news and official reports that have been critical of the responses at many levels and across many agencies. The reports confirm the situation is an ongoing crisis rather than a disaster that had already ended. The various official and news reports haven’t been kind to the Ministry of Health, have been critical of the management of MIQ facilities, and have been critical of the governments oversight around PPE, Bluetooth contact tracing, saliva testing, contract tracing generally, vaccine approval and the vaccine ordering and rollout. We all know people involved in these things and we all hear horror stories. It all seems poor agency performance was accepted by the government.

We seemed to be the envy of the world but somehow the data shows New Zealand is placed at the bottom end of the OECD for vaccination rollout and ICU beds per capita speaks for itself.

So, over a year later the ongoing management of the crisis doesn’t feel so good. The lesson for us is that we are in an ongoing crisis and the response requires careful thought, strategy, allocation of resources, and management to a conclusion. That isn’t coming together as positively as it might.

So where does that leave us all in business?

It has been an interesting year. When I think back to the things I’ve seen happening I can see business models pivoting to deliver online, adapting to working from home, extremely focussed conservation of cash within businesses, some decent spends on enabling technology, quite big changes in demand (down and up), some pretty serious discussions with landlords, a few company closures, some re-established businesses in new companies, and quite a bit of disaster preparation. Perhaps some of the most interesting has been the maneuvering to improve the outcome of possible liquidations just in case the worst happens. The worst case did seem on the cards. I am sure we are all delighted the economic fallout has been so low. At some stage that grouped up economic level discussion breaks down to real people. And for some real people the last year hasn’t been any fun at all.

I’ve been very encouraged by the resilience of the human spirit. Once the situation is worked through there can be a lot to do to improve things. At some stage there may still be a state of holding on to see what happens. Recognising the difference can be calming.

So what are the lessons we can all learn from this?

We are in a crisis management situation. This is not a discrete disaster.

Ongoing focus and delivery matter.

The economic cost for your business can be huge too, even if not 1.6 billion a week. Keep that potential cost in mind as you consider options.

We have to live with a scarcity of resources and uncertain prices. Whether your problems are having enough people and materials and/or their pricing the problem is happening right now.

So what actions should be considered?

If you sat down and prepared a crisis plan last year now may be a good time to dig it out and update it.

Revisit your scenarios to include the failure of elimination, along Australian lines.

Rethink your mitigation strategies. There are different risks and some new opportunities like vaccination that weren’t available mid last year.

You can then reflect on the overall plan and see if you have done the things necessary to lower your risks, and what you should still do.

One of the simplest measures we used with clients last year was the number of months expenses that was available in cash or overdraft. That was a pretty good guide to how white knuckled a ride that business was on, or how relaxed they could be. Put simply if you had available cash of $100,000 and monthly expenses of $25,000 then your had four months reserve. Check that every month and you can see if things are getting better or worse.

Cash is king. It is lack of cash that closes business, not a lack of profit. I read that Boeing drew down 11 billion USD of arranged overdrafts at the start of the covid crisis. They must have figured that that is why they had these funding lines available, and best to draw them down (and shift the money elsewhere?) before the banks revised Boeing’s credit limits downwards. So how is your cashflow, what is your monthly burn on cost of goods sold and expenses? and what is your available cash number? And what might you do to improve that?

Keep an eye on all the inputs to your gross profit. Some of the price rises flowing through in areas can undermine profitability in no time at all. That might mean you need to do a monthly count of both your stock and your raw material on hand to keep track of that gross profit number.

Do you need to change your terms of trade and contracts to pass on price rises? Do you want a decent prepayment term included before any fixed price quotes go to customers?

Are you on top of your business numbers? We have done some pretty insightful analysis of businesses looking at customer segmentation, share of wallet, product profitability, operating leverage and key risks around suppliers. Is there a whole line of business you should stop doing? Is there a new highly sought after profitable COVID product you should be doing?

Do also think about all three flows in your business when you consider your situation. You need to look after your cashflow and your profitability, but you also need to consider the value of your equity. It may be that in the long-term keeping your client contracts is more important than short term profitability. Subject to cashflow of course!

The Delta strain of COVID seems to be highly catchy, and the new strain out of South Africa that has been detected in NZ apparently even more so. I’ve heard of several businesses in Auckland recently having to close down for a fortnight as their staff self-isolate. I understand one shift boss begged a staff member who was waiting for their COVID 19 test results to come and stand their shift. The COVID 19 test was positive, and the factory should now be closed for two weeks while all staff self-isolate. That is a useful thing to keep in mind.

As a closing thought I remember the learning about the neutron bomb. It would cause widespread death but largely leave the facilities intact. That might be a useful model to consider as you think about keeping your staff safe.

You may like assistance thinking through your situation and figuring out where you are and what your options are. If that is the case, please do get in touch.

Tas Norness31 August 2021