Responding to the potential business impacts of COVID-19

Introduction

The COVID-19 pandemic could affect businesses’ ability to operate and their access to liquidity to finance their operations in Kenya ― both of which could impact business continuity. To shore up their responses to the impacts of COVID-19, businesses can undertake the following three-step process to manage their liquidity, conserve cash and manage their stakeholders:

Conduct a critical review of the impact of COVID-19 on operations based on its effect on the specific sector and the general country/global economy;
Conduct a rapid review of their liquidity positions and assess the resources available in the short to medium term to enable them to finance their operations and meet their ongoing obligations; and
Assess the impact of business decisions informed by the two previous points above on internal and external stakeholders and develop an effective stakeholder engagement plan.

Critical review of operations

A holistic review of operations should consider both the supply and demand sides of the value chain, from sourcing of inputs through to delivery of goods/services and collection of payment.

What is the impact of COVID-19 on availability of supplies and labour? Businesses need to undertake a critical evaluation of the potential impact of the COVID-19 pandemic on the availability of critical supplies such as raw materials, labour and external services, as local and international supply and logistics chains continue to be disrupted. This assessment should also consider whether the prices of these critical supplies will be adversely impacted by scarcity and, if so, whether the adverse cost movements can be easily passed on to customers. Furthermore, even with availability of these critical supplies, businesses must contend with the potential adverse impact of increased absenteeism or employee sickness on productivity.
Will you be able to access the market, and your customers the products? Increased travel restrictions, on the other hand, are likely to impact a business’s route to market, particularly where its products and services are not considered as “critical supplies and services” that may be exempted from the enforcement of travel restrictions. Businesses need to consider to what extent they can leverage digital platforms and other delivery methods to mitigate the potential impact of travel restrictions on their operations, and the impact of such delivery models on the attractiveness of their products from a pricing and accessibility perspective. Related to travel restrictions, businesses need to consider whether their intended customers will be able to access their products.
Are your products and services essential? There is also a need to consider the potential impact of COVID-19 on demand for the business’ products. Even in instances where route to market and customer access to products are not impacted, businesses need to consider whether their products are essential to their clientele, since consumers are likely to limit their expenditure on non-essential goods and services during this period of uncertainty.
Can your customers pay? Businesses need to worry not only about their own financial health, but also the financial health of their key trading partners. For credit sales, businesses need to go the extra mile in assessing the potential impact of COVID-19 on the creditworthiness of their customers to limit the emergence of bad debts, which will ultimately have an adverse impact on liquidity. These and any other relevant operational considerations should inform the business on whether it will be able to continue providing goods and services to its target market and, where it is able to, whether it should (in consideration of the expected costs and returns).

Rapid review of liquidity – Forecasting in the face of uncertainty

The ability to generate or otherwise access cash to meet ongoing business needs is the lifeblood of any business. Measures intended to increase liquidity and facilitate access to credit by businesses have become common features of the policies adopted by governments across the world in response to the corona pandemic. The Central Bank of Kenya, in its Monetary Policy Committee meeting of 23 March 2020, resolved to:

Lower the Central Bank Rate from 8.25% to 7.25%, with the aim of making credit more affordable to micro, small and medium enterprises; and
Reduce the Cash Reserve Ratio from 5.25% to 4.25%, with the aim of releasing additional liquidity to commercial banks to enable them to continue lending despite the evolving downturn, particularly in support of borrowers that are distressed as a result of COVID-19.

His Excellency the President, in his address of 25 March 2020 on state interventions adopted to cushion Kenyan citizens and businesses from the adverse economic effects of COVID-19, announced various measures that will, subject to approval by Parliament, provide much-needed liquidity relief to businesses during this pandemic including, inter alia:

Reducing Resident Income Tax (Corporate Tax) from 30% to 25%;
Reducing the Turnover Tax payable by micro, small and medium enterprises from 3% to 1%;
Expediting settlement of verified pending bills amounting to at least USD130 million by government ministries and departments within the first three weeks from the date of the directive; and
Expediting payment of all verified VAT refunds amounting to USD100 million by the Kenya Revenue Authority within the first three weeks from the date of the directive.

The swiftness and robustness of the implementation of these, and any other state interventions, will have a significant impact on the effectiveness of the proposed measures in delivering the much-desired relief to businesses. Businesses should, where necessary, proactively engage with their financiers to seek support in the form of shortterm facilities to enhance liquidity, or forbearance to the extent that their projections indicate a potential inability to meet debt repayment obligations.

Indeed, the need for such engagement has been acknowledged by the Central Bank of Kenya, which has directed that “SMEs and corporate borrowers can contact their banks for assessment and restructuring of their loans based on their respective circumstances arising from the pandemic”.

Furthermore, the President, in his address of 25 March 2020, also indicated that the Central Bank of Kenya would “provide flexibility to banks with regard to requirements for loan classification and provisioning for loans that were performing as at 2 March 2020, and whose repayment period was extended or were restructured due to the pandemic”. To inform engagement with their financiers and other management decisions, it is imperative that businesses understand their liquidity positions and take measures to safeguard those positions from deterioration.

What is the likely impact of COVID-19 on the liquidity of your business? Sub-optimal operations, increased cost of raw materials, reduced demand and disrupted logistics will all have negative effects on businesses’ cash flows. Businesses, therefore, need to take a pragmatic view on their cash requirements in the short- to medium-term to inform utilisation decisions. In this regard, businesses need to consider, inter alia: options for liquidating cash held up in inventory and receivables such as through discounts on sales; cost rationalisation exercises targeting non-essential costs such as entertainment and travel budgets; and the prioritization of payments so as to identify payments that can be deferred.
What do you want to get out of your liquidity review? The output of this liquidity review should be a conservative, rolling, short term (perhaps three months) cash flow forecast that reflects the business’ exhaustive cash requirements on a week-by-week basis. This cash flow forecast should also take into account factors outside the business’ control including, inter alia, the availability of critical supplies, length of the crisis, change in demand, strict travel restrictions (e.g., total lockdown), forex swings and the availability of funding in the form of additional debt facilities, equity injections and asset disposals to plug any cash deficits.
Are there potential upsides you should ignore in preparing the forecasts? In coming up with these cash flows, mitigating factors that may not be within the control of the business should not be considered given associated uncertainties as to likely outcomes and timing of their impact on cash. Such factors may include, but are not limited to, insurance compensation for business interruptions and favourable government policies such as tax reliefs/deferments, waivers of penalties and interest on defaulted payments and economic stimulus packages. Furthermore, for other critical obligations such as debt service obligations, assumptions factored into the cash flow forecasts should be grounded in documented negotiations with the respective counterparties. Ultimately, the ability to prepare forecasts that accurately reflect the new realities and possibilities, and to leverage on these forecasts to make the right business decisions, may be the key determinant of whether businesses will be dealing with financial crises long after the current crisis is over.

Stakeholder engagement

Securing the support and cooperation of your key stakeholders in respect of any plan you adopt is just as important as formulating the right plan.

Who are your key stakeholders, and what are their interests or concerns? Businesses need to identify their key internal (especially employees) and external stakeholders (e.g. lenders, suppliers, customers, regulators), the issues that affect them and their likely reaction to changes as a result of the current business environment. The identification of stakeholders and their interests should be accompanied by the formulation of robust communication plans centred around early, proactive and transparent engagement.
What are the terms of your key business agreements? Specific attention should be paid to the terms of the business’ contracts for debt, supplies, labour etc. with a view to assessing flexibility for variation of terms, (e.g., pricing and terms of payment) or termination, to cushion the business against the current crisis. Additionally, businesses may want to consider potential legal and commercial implications of inability to perform in line with the terms of these contracts. While undertaking this assessment, businesses need to consider both immediate and long-term objectives since decisions taken during this period are likely to have implications long after COVID-19. As such, and to the extent possible, businesses should evaluate the possibility of striking a compromise with their key stakeholders who, no doubt, understand the prevailing circumstances

To trade or not to trade

Ultimately, the decision that each business will be required to make following this assessment is whether it should continue trading in the current business environment. For some businesses, this will be a temporary decision around potentially moving their assets into “care and maintenance” until the crisis has passed. For others, particularly those with doubtful solvency, this may prove to be a more permanent decision.

In undertaking the reviews detailed above, corporate directors should be guided by their fiduciary duties and their obligations to the creditors of their companies. Specifically, directors need to be mindful of the risk of:

Wrongful trading: Continuation of trade at a time when there is no reasonable prospect of avoiding an insolvent liquidation or administration; and
Fraudulent trading: Knowingly carrying on a company’s business with the intent to defraud creditors by incurring credit that cannot be repaid. The Companies Act of 2015 and the Insolvency Act of 2015 provide for personal civil liability of and criminal sanctions for directors guilty of wrongful or fraudulent trading. The decisions taken after these reviews need to be revisited on an ongoing basis to ensure that they remain the correct decisions even as the circumstances of the pandemic unfold. The correct decision today may not be the right one tomorrow, especially in the event of rapid or significant deterioration of the prevailing economic conditions.

Conclusion

Businesses cannot wish away the COVID-19 pandemic. They can be proactive and ensure that they are well prepared to respond to the challenges posed by the pandemic, by acting now and acting fast. Anticipating the impact on operations, cash flows and stakeholders, and managing these aspects proactively will go a long way towards building business resilience in this time of uncertainty

At PwC, our purpose is to build trust in society and solve important problems. PwC’s trusted business advisors are available to help you navigate through the COVID-19 pandemic and emerge stronger. We can support you in areas such as: