Executive Summary
This paper discusses the impact of the coronavirus pandemic on the economies of countries, the financial management of companies associated with risk-taking, and, in particular, financial investments. Current events and expert forecasts demonstrate that the pandemic has brought severe negative consequences to the economies of states and business activities. At the same time, many companies did not consider the risks of a pandemic as harmful for their activities, so they were not ready for external threats. However, regardless of the degree of impact of the pandemic and the scale of the firm’s operation, companies were forced to review their strategies and redirect resources to the essential areas to continue their work. These particularities, as well as the uncertainty of the further development of the pandemic, have led to tightening conditions in the investment market. Consequently, the coronavirus pandemic significantly affected the financial management of companies by emphasizing the need for a thorough risk assessment and planning, since its consequences will have a long-term impact.
Introduction
Outbreaks of diseases are a problem for any state, but usually, the economic and health system has resources and developed scenarios to reduce their negative impact. However, the pandemic of infectious diseases has a more significant effect, since n the context of globalization, states, and their inhabitants are connected. In addition, the situation dangerous to human life and health requires significant financial investments around the world. Consequently, adverse changes in one state have more significant consequences since they affect both the country’s internal processes and the financial situation outside its borders. Moreover, the pandemic has a considerable effect on the global and national economies in the short and long term. Both multinational and local companies need to change their financial management and sales strategies to maintain their business and functionality. Therefore, this paper will examine the impact and consequences of the COVID-19 pandemic on the economy, companies’ financial and risk management, and investments in particular.
Impact of the Pandemic on Economy
Coronavirus is not the first pandemic in history; however, such a massive spread of infectious disease has not occurred in the world for decades. All pandemics have common features and consequences, the main of which is the spread of disease across a large territory covering several countries at a fast pace (Madhav et al., 2017). Other features are a large number of infected people and deaths, as well as significant negative social, economic, and even political changes in countries and the world.
However, the coronavirus pandemic also has some peculiarities due to the globalization and integration of the modern world related to both health care and the economy. First, the free and repeated movement of people across borders allowed the virus to spread at an incredibly high speed. In comparison, the H1N1 pandemic lasted almost a year and a half and took the lives of 203,000 people (Centers for Disease Control and Prevention, 2019; Jorda et al., 2020). At the same time, the coronavirus pandemic in just five months brought death to 338,000 people (European Centers for Disease Prevention and Control, 2020). Thus, the consequences of this pandemic can also be more harmful and large-scale.
Moreover, although globalization processes have been going on for several decades, the pandemic has also shown the interdependence of countries involved in world trade. Madhav et al. (2017) note that a pandemic can cause both short-term fiscal shocks and longer-term shocks to economic growth through various channels. The short-term consequences are associated with enormous costs for the healthcare system and infrastructure to overcome the pandemic, as well as lower tax inflows due to quarantine measures. The long-term effects are caused by the indirect impact of the pandemic, such as decreased workforces, job cuts, or business closures, and reduced incomes in industries, especially such as tourism and the hospitality business. In this case, the government’s task is to provide benefits, loans, and financing to support the business, since it is the primary source of taxation and income to the national budget. States that were prepared for a pandemic and had an effective health care system and financial reserves have powers to reduce the negative impact on the economy. However, less prepared countries could face a deep crisis and stagnation.
It is also worth noting the global impact of the pandemic, which has short-term and long-term effects. A striking example of globalization is the situation in multinational corporations, a significant part of whose production is concentrated in China. Nike, Starbucks, and Apple have manufacturing or market in China that give them a considerable portion of the profits, and quarantine carries risks to them both in the supply chain and in sales (Menickella, 2020). Moreover, all three companies are American, and a decrease in their profits threatens to reduce tax revenues to the country’s budget. At the same time, Jorda (2020) notes that the interest rate, which shows the balance of the economy, usually decreases within two decades after the pandemic and only after four decades returns to its previous level. Madhav et al. (2017) also determine that a pandemic could cut the global economy by 5%. Therefore, one can note that the consequences of a pandemic can affect some states’ economies from several decades to half a century by considering the economic inequality in the world.
Impact of the Pandemic on General Financial Management
The coronavirus pandemic has a significant impact on any business, and most often, it is negative. Quarantine measures prohibit the operation of most stores and public places, as well as decreased demand for them due to fear of infection. In addition, even for active companies, the situation can worsen due to problems in the supply chain, as well as personnel management features. The second aspect has several manifestations since organizations need to introduce measures to avoid interpersonal contact and reduce the risk of infection. If these measures are ignored, the risk of losing staff due to illness or death becomes much higher. The positive impact of a pandemic can only occur for companies that sell demanded goods, such as medical masks or online products. However, the pandemic’s main effect is that all organizations need to make decisions quickly, assess risks, and restructure their financial management strategies and mechanisms.
Financial management includes many interconnected elements. Financial management consists of analysis and planning processes to maximize profits (Tulsian P.C. & Tulsian B., 2017). These processes involve finding sources of financing, resource allocation, profit sharing, and investment (Tulsian P.C. & Tulsian B., 2017). However, in a pandemic, each of these stages can be limited or disrupted. For example, the ban on the work of public catering places deprives the business of financing sources or buyers who made a profit. At the same time, business owners need to pay taxes and rent; therefore, they do not have the means and ability to distribute resources and income, as well as invest. With the limited work of the company, owners need to change the structure of the distribution of resources to invest only essential elements and minimize costs and loss of profit. In addition, investment opportunities are also limited during a pandemic because the uncertainty of the situation creates high risks that investments will not bring benefit.
Consequently, companies must consider many factors and change the mechanisms of their work and financial management to maintain opportunities for recovery after the end of the pandemic. First, companies should consider depreciating their financial assets and adjusting their distributions to avoid losses. In addition, companies need to evaluate supply chains and their stocks to be prepared for changes and replenish or sell the product until possible. In general, the main task of financial management during a pandemic is to assess risks and highlight the most important and profitable aspects of financing activities for reducing losses.
However, even in conditions of sound financial management, not all companies have the ability to adjust their work. Small businesses in such areas as tourism, sports centers, or cosmetic services face the most problematic situation. The ban on their work can lead to bankruptcy since, in the absence of profit, rent and taxation usually remain mandatory. Besides, if a company has loans and receivables, owners can get serious debts that cannot be covered even by the sale of the business. In this case, the activity of financial management can be the search for new sources of financing. For example, many states provide tax incentives or financial support, some landlords reduce rental costs, and fundraising and charitable organizations can provide funds to cover expenses. In addition, the dismissal of employees or their unpaid leave can be an unpleasant but necessary step. Consequently, a pandemic has a significant negative impact on business, and changing and adjusting financial management mechanisms is an essential measure to maintain it in challenging environmental conditions.
Impact of the Pandemic on Companies’ Risks-Taking
Coronavirus significantly affected the ability of companies to take risks for increasing their profits, since pandemic uncertainty added to the traditional predicted risks. At the same time, while some companies have strategies and a rational approach to assessing risks and changes, others cannot cope with the problems that the pandemic brought them. Consequently, while for some companies, risk-taking is just more dangerous due to the uncertainty of the pandemic, for other firms, uncertain financial investments can become fatal.
Many analysts and financial experts emphasize the importance of risk management and note the problems that companies have encountered. Willcocks (2020) says that even though economic cycles are a well-known concept, a surprisingly large number of companies believed that a recession would not come. Hence, these did not invert their preparations for crisis and did not use available risk assessment methods. At the same time, Schoenfeld (2020) also highlights that 54% of companies did not include a pandemic in the list of potential risks for the decline of their business. Consequently, with the onset of the pandemic, these companies were not ready to confront external threats, and now they are probably struggling with their consequences and less likely to accept new economic risks.
Moreover, even companies for which the pandemic did not have significant negative consequences, take a more detailed and balanced approach to risk assessment. Experts note that a pandemic creates an environment in which it is difficult to assess possible risks accurately, since it is not yet known whether there will be a second surge of diseases and quarantine (Williams & Hinchliffe, 2020). For this reason, companies pay the most attention to creating sustainability of their business to future global challenges related both to the impact of the pandemic and other external conditions. At the same time, Willcocks (2020) says that the close interconnectedness of financial markets and the business system makes them vulnerable, and only some companies can benefit from such a connection by taking risks. In general, risk-taking under conditions of instability and unpredictability is an unreasonable step.
Consequently, a pandemic creates conditions in which risk assessment becomes more difficult and less accurate. This feature and uncertainly keeps companies from taking financial risks since the rapid change in external conditions threatens to fail. For example, investing in sub-brands or start-ups can be riskier because a pandemic can affect the supply chain, personnel, and the company’s management generally in the event of a second wave of the virus spreading. At the same time, the World Economic Forum and numerous experts recommend investing in the development of risk management and strategies to create a sustainable and continuous business (Smith-Bingham & Hariharan, 2020). Thus, in a pandemic, companies are less likely to make risky financial decisions and invest funds in more sustainable and demanding areas of their business.
The Pandemic Effect on Firm’s Financial Investment
The problems of financial management and risk-taking are directly related to the financial investments of companies since they require funds, as well as confidence in profit. However, the pandemic has harmed both companies’ financial stability and the environment in which investments can turn into profits. Consequently, firms have less ability and willingness to invest in other companies or products because of the high risk of losing their funds.
The first aspect on which the pandemic was noticeably reflected in the situation on financial markets as many companies has lowered their value, while some of them have raised it. For instance, cruise companies that ceased operations due to a pandemic suffered the most considerable losses from 80 to 86% (Schoenfeld, 2020). At the same time, some companies raised prices of their actives as their goods or services are in demand during quarantine, which means for them an influx of investment. However, in general, investors put forward much more stringent requirements for evaluating companies and prefer short-term investments because of the high risks of changes in the market due to the second wave of a pandemic or the economic consequences of current events.
At the same time, two trends create a relative balance in the economy for some companies. According to experts’ prognosis, foreign direct investment in all countries will decrease by 40% in 2020-2021, which means a reduction in funding for firms (“How investment policies, “2020). On the other hand, the policies of states and international organizations are aimed at mitigating the pandemic effects, so they provide investments, loans, and benefits to vital industries and companies. Consequently, the specialization of companies creates unequal conditions for business as some firms have advantages over others.
At the same time, depending on the level of financial development of the companies and the problems they encountered, firms also assess the risks and adopt different strategies for investing. For example, large multinational companies can invest even in high-risk products or industries; however, small and medium-sized businesses should highlight the most critical sectors of their activities and bring funds to support them. In addition, World Economic Forum advises investing in Africa and its industries, since interest rates are low, but the region has significant potential for growth with the availability of resources for development (Selassie, 2020). Therefore, despite the general trends of instability, companies can receive financing and invest after a rational assessment of risks.
Moreover, a universal recommendation in the field is to invest in resilience to a pandemic or other external threats. The current situation shows that many companies were not ready for drastic and severe changes, which led to significant losses in their profits or even bankruptcy. At the same time, the pandemic has not yet ended, and in the absence of a vaccine, the virus can spread even more. In addition, history demonstrates other threats, such as natural disasters, terrorism, or economic crisis. Consequently, sustainability and preparation for periods of recession, and an adequate risk assessment should be a priority for any company’s investment. Thus, the current changes in the economy and the financial market demonstrate that the pandemic has brought significant changes for investors and companies due to high financial risks, which have long-term consequences.
Conclusion
Therefore, the coronavirus pandemic significantly affected the economies of countries and the financial management of companies, shifting the focus on risk assessment, and mitigating the harmful impact of the crisis. Changes affected all countries to varying degrees, and although there are firms that have benefited from this situation, most companies have had to respond quickly and change their financial and resource management strategies. Increased risks were also reflected in the financial investments of firms since only the most profitable and sustainable projects are acceptable for investors. Consequently, although the pandemic had different effects on economies and companies, its consequences have long-term impacts, which have already changed approaches to financial management.
References
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