COVID-19 – Can your business survive a recession?

The Reserve Bank of Australia this week cut interest rates to a record low and announced measures to prevent a coronavirus-driven recession. Could your business survive a recession? Here we outline steps to take to build in resilience for business.

As the Reserve Bank of Australia (RBA) took steps this week to shore up the economy in the face of a worsening economy, other analysts from Goldman Sachs and KPMG also predicted a looming recession.

Reserve Bank Governor Philip Lowe warned the RBA is “expecting a major hit to economic activity and incomes in Australia that will last for a number of months." “We are also expecting significant job losses."

Goldman Sachs economist Andrew Boak says the bank continues to expect a recession in Australia but globally Goldman Sachs has warned in a report of a “shortlived global contraction which stops short of an outright recession”. And KPMG has warned in a report that Australia’s economy could take almost a decade to recover from the coronavirus fallout, even after being cushioned by the Federal Government's $17.6 billion stimulus.

Modelling by KPMG warns the potential for a fully blown global economic crisis, while not imminent, "is now very real", and that Australian GDP would be at least 0.9 per cent lower in 2020 because of the COVID-19 pandemic.

What can business do?

As the economic picture deteriorates, businesses are being urged to act now rather than later in order to set themselves up for tougher times.

Australian companies that did well after the Global Financial Crisis (GFC) took measures to stabilise their balance sheets immediately and all companies should now do the same in the face of the COVID-19 crisis, says Andrew Charlton, a Director at Alpha Beta Advisors.

He says boards and managers should take the following four steps in order to deal with the current crisis.

Step One

Try and understand the range of potential consequences. That means thinking through the potential impacts on your suppliers, the potential impacts on customers and how they might respond, competitive dynamics and other dislocations in the market. Think about all the potential impacts that could come at your organisation from different angles.

Step Two

Ask the executive team to prepare and plan for the different scenarios. In 2008-09 some Australian companies were well prepared and very quickly put in place plans to deal with worst-case scenarios and medium case scenarios, without throwing their hands in the air. They performed generally better.

Step Three

It is important to shore up the financial implications of those scenarios. The Australian companies that did well through the last crisis took early decisions to stabilise their balance sheets. Companies made tough decisions early on around capital raising and debt reduction that put them in a good stead, not just to get through the crisis but also in a good position coming out of the crisis to capitalise on the U or V shape recovery.

Step Four

Keep an eye on the long-term and make sure the actions you take position you well for recovery for long-term growth and future changes in the market. Even though it may be tempting to cut back on things that are more long-term and less immediate, a longer-term focus will enable some companies, if they emerge – and hopefully they will, to profit out of this crisis.