March 17, 2020
Business Continuity Planning for COVID-19 (and Other Disruptions)
Posted by Restructuring Team
Although we don’t yet know what its ultimate impact will be, COVID-19 highlights the importance of business continuity planning. Organizations can better manage this and future business disruptions by examining their operations to understand how interruptions can affect their company, employees, vendors, customers and markets.
Even a few hours of response planning will prove more effective than being indecisive or ignoring the potential threats to your operations, cash flow and staffing.
In broad terms, an effective response plan involves these key areas:
- Identifying key personnel and functions
- Developing an employee communications plan and updating staff as events and your plans evolve
- Testing remote access to key systems
- Coordinating with vendors, customers and lenders
- Assessing your short term and mid-term financial situation
Start at the Top
A critical step in effective continuity planning is the business owner or partners identifying the most likely, and the most important, implications of an extended disruption. Think about a variety of situations or events that could challenge the company and its ability to sustain an effective response.
Unlike a natural disaster with immediate effects that tend to last a few days, a virus pandemic can cause disruptions for weeks and months. This extended period makes short-term planning difficult and reinforces the importance of building adaptability into your plans.
But note, you shouldn’t let this adaptability lead to inaction. A common mistake that many companies make when faced with several choices, none of which may be optimal, is not deciding anything. This indecision costs valuable time in the earliest stages of a potential crisis.
After senior leadership identifies key areas to focus on, involve functional leaders to bring different business units together. A key to success in this stage is maintaining a focus on important functions without getting lost on tactical details, such as employee contracts, that can lead the team to overlook more strategic areas, such as communicating with customers.
Communication is a key consideration in keeping the business operating smoothly. Identify who will be in charge of maintaining communications with employees, customers and suppliers so all key stakeholders understand the disruption and, more important, how the company is responding.
Your functional experts should also discuss their plans with peers at other organizations. These leaders may have additional ideas or access to resources that could be helpful to your situation.
Managing Expense and Revenue Impacts
During an extended disruption, many companies could face the unfavorable combination of expenses rising while revenue declines or is interrupted. For instance, a business may need to have its facilities disinfected, pay higher-priced alternate suppliers or arrange contingent workers to fill important roles.
Consider the most effective reaction to a financial disruption. You may have to ask vendors for discounts and extended payment terms and notify lenders about potential violations of debt covenants. Similarly, your clients and customers may experience financial difficulties that prompt you to extend credit or take a more flexible attitude toward enforcing contractual terms.
In any of these situations, clear communications and explanations of how you plan to respond and recover can be helpful in inspiring patience that makes the financial impact of the disruption easier to withstand. For example, talking to a vendor before a payment is delayed or with your lender before you breach a covenant can establish better trust and avoid a negative overaction in the case of a surprise. Remember, your contact has a boss, too, so the better informed they are, the better they can manage up.
Maintaining Your Staff
Staffing is another key consideration. Think about the functions that need to continue, and who will perform those critical roles. If there is time, this may be an opportunity for cross-training so someone can fill in for a team member who is out sick or caring for a sick family member.
Consider key roles such as your finance team or payroll. If you lost someone for 21 to 30 days, who would be able to step in? (If a job requires technical or regulatory expertise, arranging to outsource that role during a disruption may be a more effective option than cross-training.)
Along with thinking about who’s going to do the work, consider how (and where) the work will get done. If local travel restrictions are imposed, make sure your people have remote access to the key systems the company needs to function. Cloud and mobile access can be very helpful in making it easier for your teams to get work done.
You also need to look at the financial implications of staffing decisions. If you decide to continue paying your staff during a disruption, for instance, you need to evaluate how much you’ll pay them and for how long. You also need to identify who’s going to administer those payments, as well as any unemployment insurance claims that may follow. If your team is affected by the disruption or overwhelmed by the volume of work, bringing in outside help may be necessary.
Cash Is King
With the current conditions, many organizations will face weeks, if not months, of exceptionally poor business conditions. For most, the revenue lost in this period represents a permanent loss rather than a timing difference and is putting sudden, unanticipated pressure on working capital lines and liquidity.
Some companies are able to maintain adequate headroom by making drawdowns on their credit lines. Others are finding that they need to approach their banks to arrange temporarily larger facilities or covenant resets/waivers.
Smart companies will update their short- and mid-term cash flow plans to be more conservative and incorporate the impact of the new headwinds. Many will also rely on third parties with experience in crisis cash planning who can be more objective with the approach and assumptions, as it is easier to get support from outside lenders or donors when they know the plan was well vetted, especially if the need is greater than anticipated.
As you develop your continuity plans, it always helps to keep the main goals in mind: ensuring your organization and operations can withstand the short- and medium-term implications of the disruption and be better positioned to recover when the market returns.
You can use our Crisis Planning Checklist to help minimize potential disruption to your employees and operations. Have questions or need some assistance? Reach out to our experts.
Our Restructuring experts, Michael Hogan and Alex van Dillen, are Silicon Valley’s most experienced restructuring specialists for creditors, investors, boards, and executive management of financially distressed companies. They help companies prepare for downside eventualities to better understand their options, prioritize them, and drive toward the most effective outcome for stakeholders involved.