Two weeks ago, I wrote in this blog that the chance of a recession being triggered by the COVID-19 as being “Probable.” This situation has changed very quickly. At this point, we are way past “Probable.” We are in the early stages of a recession. You heard it here second. The stock market, which is always about the future, was the first to tell us that a recession is upon us.
The questions, at this point and in my mind are, how bad will it be and how long will it last?
As a sidebar, we are in an odd time where this pandemic is being viewed differently by people, which is natural since we know so little, but also being viewed as a partisan issue. Some seem to think this is being over-hyped by the Left to undermine Trump and believe in a month everything will be back to normal. On the other side, some think that that this is barely the beginning of a global health crisis that will be with us for years and will change our lives forever. And that many millions will die.
I try to stay objective by reading documents issued by doctors and scientists rather than political pundits and mainstream press. Based on this, I believe this is going to be a very big deal. Think how the September 11th terrorist attacks changed our lives forever; TSA, international border crossings and all. I think this pandemic will be just as profound in the long-term.
But what about the short-term? I think all businesses need to be making contingency plans. This will probably take the form of Survival Budgets in case things get really bad. I have clients who are stress-testing their 2020 budgets by reducing revenues by 10%, 20%, 30% and 40%. Then the costs—invariably payroll costs—must be reduced to keep the business at breakeven or better. If revenues are reduced by, say 80%, that’s pretty hard to deal with.
I think the impact on businesses will resemble a bell curve. There are some who will be affected so profoundly, that they will fail. We’re already seeing that. At the other end of the scale, there are some businesses that are actually benefited by the current pandemic. I’m seeing this with, perhaps, 5% of my clients.
Most businesses, probably the middle 80%, will be negatively affected to one degree or another. Trying to guess the level of impact is difficult but I think any business must try to do this. The level of debt in the business will vary, of course, and affects the flexibility of choices owners/operators have available to them.
I mention above that cost reduction invariably means payroll cuts. This can take a number of forms. The most obvious is layoffs. But there is also the possibility of temporary furloughs. Another possibility is to make full-time employees 80% or 60% of full-time equivalents. The State Department of Employment will help make up the difference in pay for such reductions. This is a great State program that should be used more. There may also be the option of encouraging employees to take unpaid leave.
If you’re a business owner/operator who has been waiting to see how this mess works out, I’d urge you to not be complacent. The problem is upon us and it is time to proactively deal with this very serious issue.
For those who want to see what the scientists and doctors have to say about this, go to this link: https://special.croi.capitalreach.com/.
- Zunyou Wu, Chinese Center for Disease Control
- John T. Brooks, US Centers for Disease Control
- Ralph S Banc, University of North Carolina
- Anthony S. Fauci, National Institute of Allergy and Infectious Diseases, National Institutes of Health
About the Author:
David Lightfoot has almost 40 years of accounting, finance and operational experience. Most of the last 30 years David has served as Controller, Chief Financial Officer or Vice President of Finance for small and medium-sized businesses. He also has operations experience and has worked as a CEO, giving him a broad business perspective.
David’s industry experience includes professional services, healthcare, real estate development, construction, property management and software.
His peers have called David “a world-class listener.” He considers this his greatest strength.
David works with owner/operators to improve their businesses. He has developed an expertise in helping owners increase the value of their businesses and position the owner for an exit from the business.
David has been a CPA for almost 40 years and also is a CMA (Certified Management Accountant). He is a Seattle native and a graduate of the University of Washington, holding a degree in accounting.