Introduction
The recent coronavirus pandemic has led to significant challenges in all sectors of the economy. The global nature of the problem only worsens the situation – companies that rely on imported materials for conducting their businesses are facing additional hardships. Because consumer demands have decreased, companies are unable to sell their products in the same quantities as before. In this context, the role of financial managers is critical to the survival of firms. They need to make correct decisions about funding, risk management, and liquidity position. This paper will overview how the pandemic is expected to impact each of the mentioned areas of corporate finances.
The Characteristics of the Pandemic and How It is Expected to Affect the Economy
Despite becoming well-known only recently, coronavirus has been challenging animals and humans for more than a century. Scientists suggest that first coronavirus cases date back to the early 1900s when animals in Germany started to be found with fever (Cyranoski, 2020). At that time, however, humans had no knowledge of what might have caused the disease in animals. Among the notable characteristics was the dynamic nature of the virus – it could infect almost any animal and be passed from one type to another. In the 1960s, British and American biologists discovered a previously unknown group of viruses which, under inspection, resembled the solar corona (Cyranoski, 2020). Thus, this group of malignant biological bodies was named as coronavirus. While a coronavirus could lead to severe adverse outcomes for animals, it was believed that the virus did not pose a significant threat to humans (Cyranoski, 2020). However, when people started dying because of a coronavirus disease in 2003, opinions changed.
Despite ongoing research, much is unknown about the virus. The reason is that the current type of coronavirus is slightly different than the virus that outbroke in 2003. It is much more lethal due to how the virus cells mutate (Cyranoski, 2020). Coronaviruses have the ability to recombine with other subtypes of coronaviruses, which allow them to infect new cells and prevent them from weakening over time (Cyranoski, 2020). Due to many variations, coronaviruses affect people of varying ages differently. Therefore, there are many symptoms that are associated with coronaviruses – fever, tiredness, loss of smell, headache, and others (Cyranoski, 2020). Coronaviruses pass easily from one person to another, making any collective activities a source of potential threat. These characteristics may have a substantial impact on the global economy because the majority of industries are currently shut down.
It is currently early to be able to make accurate predictions on how the recent coronavirus pandemic will eventually affect the global economy. The reason is that rapid coronavirus case growth is being observed in many countries (Craven et al., 2020). However, experts believe that many of the major economies will face a GDP decrease by around 2.4 percent (Duffin, 2020). The number may seem negligent, but when it is converted to dollar values, the magnitude of potential economic disruption will be much more evident. In 2019, the global GDP was estimated at 86.6 trillion US dollars (Duffin, 2020). It means that if the worldwide GDP shrinks by 2.4 percent, it will result in more than 2 trillion dollars in economic output reduction. This number is significant, especially for emerging markets – the major portion of this burden may fall onto developing countries.
The primary reason for economic stagnation is a decrease in demand. The pandemic put many industries, such as tourism and leisure, on hold. In turn, product manufacturers stopped their operations, which decreased demand for oil and other fossil fuels (Duffin, 2020). Therefore, by helping consumers, the government may solve many of the current economic problems. However, because coronavirus is not disappearing any time soon, the economy will resume its operations under new rules, which will inevitably impact managerial decisions.
Expected Impact on General Financial Management of Companies
As the demand for all products has decreased, except for necessities such as food and medicine, companies are facing the threat of bankruptcy. To avoid such a disastrous outcome, companies need to revise their financial management strategies. Among the primary goals of financial management is ensuring that the supply of funds is stable so that company may operate without any hindrances (Institute of Chartered Accountants in England and Wales, 2020). While within an adequate economic environment, companies seek funds from investors and similar sources, the coronavirus pandemic is luring investors away from investing in companies (Hudecheck et al., 2020). Many of the companies experienced a decrease in market capitalization because of the panic on the market (Hudecheck et al., 2020). Therefore, the financial management landscape will inevitably face changes, and the business strategies will need to adapt to current circumstances.
The first activity that is going to be done in every company is the recalculation of capital requirements. Because of the crisis, all non-critical projects and ventures will be delayed, which will influence forecasts regarding expected costs and profits (Institute of Chartered Accountants in England and Wales, 2020). A significant amount of work is expected to be done in determining capital composition (Hudecheck et al., 2020). As investors and other individuals are reluctant to make hasty decisions, it is going to be challenging to seek funding from outside sources. When possible, companies will have to rely on equity capital.
Generally, funding sources include the issue of shares, bank loans, and seeking public deposits by offering bonds. In current circumstances, however, companies will need to emphasize the importance of researching various options regarding government aid. Many countries are providing their business sector with zero percent loans or gratuitous payments (Hafiz et al., 2020). Financial managers need to monitor the government announcements continually and should be ready to provide all necessary reports and documents in order to receive aid.
Calculation of expected costs falls under the responsibilities of financial management. Calculation techniques are expected to change because of many of the new government regulations regarding business operations within the times of coronavirus pandemic. For instance, there are requirements for companies that are about to launch after shutdown. Employees should be provided with safe conditions for work, and hygiene products should be placed throughout the company site (Hafiz et al., 2020). Social distancing should be practiced even at work, which puts constraints on spacing requirements. Compliance with such government regulations will inevitably result in additional costs that should be accounted for when making any forecasts and financial plans.
The subject of dividend payouts is also expected to be adjusted. Currently, the ultimate goal of companies is to avoid bankruptcy. Therefore, any surplus should be used to ensure the company’s stable operation instead of providing remuneration to executives and shareholders. Stock owners will have to cope with the current difficulties by understanding the decisions made by the management. Financial managers will be expected to decrease the dividend rates and use the retained profits to pass the current challenges.
Expected Impact on Financial Risk-taking
Risk-taking can be viewed in the context of choosing projects to invest in and determining the leverage. In terms of investing, companies will be more cautious when making decisions. Available funds should be used to finance the most necessary activities and projects with the most favorable forecasts. There are several reasons why such expectations exist. First, it is not yet possible to claim when life will go back to normal (Ford, 2020). Much relies on the discovery of the vaccine – it may happen soon, but there is also a risk that the coronavirus will mutate to such an extent that all developments will be rendered useless (Ford, 2020). In this situation, all work will have to be started from scratch, and the lockdown period will be extended.
In the case of extensions, companies will have to be able to operate even with no revenue. Therefore, the presence of reserve funds will play a significant role in ensuring that companies survive through the crisis (KPMG, 2020). Spending available money on a long-term project that is expected to generate profit in several years and that requires constant funding does not seem to be a favorable idea. Therefore, risky endeavors are less likely to be considered in the near future. Instead, companies will concentrate on short-term projects with lower return-on-investment forecasts but with higher chances of success.
The second reason why businesses are expected to be more cautious when taking risks is consumer behavior. It is unclear how the economic shutdown will eventually impact how consumers behave (Ford, 2020). There is a probability that consumers will refuse to buy certain products (Ford, 2020). For instance, to ensure family safety, households may become reluctant to travel to grocery stores. Instead, they may opt for using only delivery services, in which case it would be irrational to invest in building a large physical facility. It is not possible to make accurate judgments because of the volatility of the current situation.
Another context in which risk-taking can be considered is the notion of leverage. In short, highly-leveraged companies have more debt than equity, and low leverage firms have more equity than debt (Hayes, 2020). While the coronavirus pandemic hit almost all sectors of the economy, not all sectors should be blamed for the recession (Ford, 2020). Experts say that highly-leveraged firms put extra pressure on governments and banks (Ford, 2020). Companies that have more debt agitated for credit vacations and were the ones that asked governments for support. Moreover, the market values of highly-leveraged companies have dropped the most (Ford, 2020). Therefore, it is now evident that there is a risk in investing in highly-leveraged companies – they have more debt than equity and no funds to resist crises. Executives choosing between high-leverage and low-leverage strategies are likely to choose the latter one. As previously mentioned, many companies will have to rely on their equity to battle the challenges posed by the pandemic. When there is more debt, however, it is not possible to cope with crises without a significant amount of external support.
Expected Impact on Firm’s Liquidity Position
In times of market recession, liquidity is significant because it allows companies to pay for their current expenditure and avoid risks of going bankrupt. A company’s liquidity position is determined by several factors. The first determinant is how fast the company is able to convert its assets into cash (Farahvash, 2020). The second determinant is the debt capacity of the company – how likely it is for the company to get a new loan to pay for its current liabilities (Farahvash, 2020). The situation around COVID-19 will impact liquidity positions of companies in several ways. It is possible to observe that the majority of companies are laying off their workers to decrease their expenditure (Adrian et al., 2017). However, such an approach is not the only strategy for saving cash and improving liquidity.
Any debt is a risk because it has to be repaid back indifferent to the extent to which a firm succeeds. As mentioned before, investors and financial managers will be inclined toward the minimization of risk. Therefore, it is less likely that companies will be willing to put an extra burden onto themselves by getting a loan to pay for current expenses. Instead, unused and unnecessary assets will be sold to improve the liquidity position of companies (Adrian et al., 2017). In case if the debt is the only option, companies will consider long-term liabilities instead of short-term loans because, under current economic conditions, it is irrational to make favorable financial forecasts. In general, companies will seek longer payment cycles because it will allow them to reduce pressure.
An apparent solution to improving liquidity position is increasing the amount of cash that goes in. However, in times of lockdown, it is not possible to sell through physical stores (Benmelech et al., 2017). It is also not possible to meet with clients and negotiate (Benmelech et al., 2017). Therefore, companies need to become more creative and adapt to current circumstances. When feasible, companies should sell their products through online stores. Meetings with clients can also take place on an online communication platform.
As it has always happened, companies will come out of this crisis even stronger, with new technological tools that are able to solve present challenges. To achieve this outcome, however, companies need to focus on finding ways of selling and marketing their products (Adrian et al., 2017). Some companies may even change their business sector based on current consumer demands. For instance, instead of producing garage doors, a company may start selling industrial sanitation equipment. Such an adaptation will allow companies to dispose of their materials stocked in warehouses and generate a fair amount of profit.
Conclusion
Any financial crisis is not only a burden but also a set of opportunities businesses can use to evolve and strive. To come out of the current global economic recession, companies need to make certain adjustments to their financial management strategies. It is critical to consider different funding sources as private investors are less likely to make large contributions in the near future. In addition, companies are expected to minimize their risks and opt only for long-term loans when needed. While the majority of firms are dismissing their employees to improve their liquidity position, some companies will sell their unused assets or redirect their usage into producing demanded products.
References
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