The mid-market’s perceived resilience and agility might have helped it deal with the massive shock of the COVID-19 pandemic. Will this same resilience transfer to the next phase of the crisis as economies begin to reopen?
The COVID-19 pandemic, subsequent lockdown and resulting economic shock have tested business in entirely unprecedented ways, and their impact is likely to be felt for years to come. But, against this backdrop, IBR data [i] finds the global mid-market to be relatively upbeat.
Although more than 65% of mid-market businesses said COVID-19 would hit their 2020 revenues, the data suggests the impacts on the mid-market fall short of the worst predictions of the wider economy. By comparison – and in findings that are common across other sentiment surveys of all sizes of firm – CNBC’s Global Q2 CFO Council Survey [ii] reported that 88% of CFOs expect a 'negative' or 'very negative' impact to their businesses.
While the pandemic’s impact has been significant, less than 2% of IBR respondents said they expect to cease trading as a result of it. Globally, one in three businesses expect to continue trading based on their existing financial situation, while 38% said they can continue to trade using existing funds but would need to cut costs and/or restructure. Just under 20% said they would need to supplement cost-cutting and restructuring with access to new funding from lenders, investors or government grants.
Read more about the impact of COVID-19 on global and regional economic health.
The data suggests many mid-market businesses have met the crisis with the resilience previously identified as a characteristic of this sector. [iii] As we examine how the crisis has affected business, we explore the strategic decisions taken pre-crisis that have aided this resilience and consider what companies are doing to get ready for recovery.
In results that support the notion of agility in the mid-market, IBR data found that most mid-market businesses took decisive steps to deal with the economic effects of the pandemic.
Nearly half (47%) had made significant and fundamental changes by adjusting their business strategy to meet the transformative nature of the new trading environment. Generally, companies were more likely to change strategy in sectors where significant revenue losses were expected.
Cash-flow management has been critical – and remains so. Governments were quick to offer support, and businesses mainly preferred to seek government assistance over external finance. This was probably due to the more favourable terms of government finance encouraging firms to use such schemes, even if their business remained financially viable. Globally, just under 33% of firms applied for government grants and 30% sought tax concessions.
For the most part, businesses took a multi-pronged approach to ensure liquidity. Just under 30% of companies swept idle cash into working capital or drew down on banking facilities. More than 26% spoke to lenders about new credit, and around 24% negotiated with their customers to get them to pay early. Developed APAC stood out as taking fewer actions around cash management than other regions. In contrast, more emerging APAC businesses embraced the full gamut of options available to them.
Given the nature of the pandemic, it’s little surprise that over half of businesses implemented flexible working, with professional and financial services companies able to take these steps more easily. Meanwhile, around 30% of firms globally reduced labour costs through cutting pay, staff or both, and reduced or suspended some operations. In some cases, these actions were forced by lockdowns; for example, in the consumer products sector, more than one third of firms reduced capacity as many countries enforced shutdowns on non-essential retail.
The crisis has alerted businesses to the need for future crisis management, the application of technology and digital transformation for ensuring continuity and the need for improved organisational flexibility. Some impacts of the pandemic will be permanent, with more than a quarter of businesses believing they would make some fundamental changes to their products and services in the future. The travel and tourism, Technology, Media and Telecommunications (TMT) and mining sectors all said this was a focus area for change in the future.
More than one third of businesses globally, and particularly in the agriculture and manufacturing sectors, cited supply-chain resilience as critical to future strategy. The impacts on China highlighted the issue for global automotive and electronic manufacturing early on in the crisis. A similar number of businesses are already reviewing existing suppliers and making plans to mobilise supply chains in preparation for recovery.
Among sectors that were most responsive to the pandemic, the oil and gas sector was very active. In response to a sharp decline in fossil fuel prices and demand, it reported high values across the range of potential actions available. Professional services were similarly active, while utilities – possibly being less affected by lockdowns through performing essential business – were among the least reactive sectors in the economy.
Global lockdowns are already relaxing in many jurisdictions, while restrictions are beginning, or are poised, to ease elsewhere, and leaders are looking towards a recovery phase. But the transition out of a crisis is often the most vulnerable period for an organisation. Ramping up purchasing orders and building inventories can quickly overstretch businesses and drain liquidity as they spend more to get back on to a ‘normal’ or growth footing.
Cash flow will remain a critical concern for many companies as they enter this new phase. More than 40% of businesses globally said they have started planning for financial resources to help them through recovery. The withdrawal of government support and tapering of programmes such as furlough will leave businesses more exposed, and they will also be factoring into their plans the payment of taxes and VAT that were deferred in some countries after the pandemic hit.
With the crisis far from over, nearly 50% of businesses globally are already considering workplace safety plans. When and how employees return to work will be crucial to preventing, mitigating or working through a second wave outbreak.
But there are encouraging signs that the resilience and agility that has been a hallmark of the mid-market through the pandemic are now being applied to this next phase. In preparation for recovery, many businesses are looking into how to better use scenario planning and grappling with people and leadership challenges.
Businesses are also thinking hard about how they focus their resources to ensure stable and profitable recovery through a turbulent economy. More than 40% said they have started identifying which customers and markets to prioritise as well as which products and services will best sustain them.
The global pandemic and the resulting lockdown have tested the mid-market like no other event in living memory. Many businesses have shown remarkable adaptability. Those organisations that were most prepared have fared more positively through the worst of the crisis. Similarly, as the global economy enters a new phase, vigilance and agility will be critical. Cash-flow management must remain a focus to avoid business failures. Meanwhile, operational flexibility, robust technology and careful planning for myriad potential scenarios ahead will be vital to not only protecting businesses but helping them grow.
Speak to a Grant Thornton adviser in your location to discuss how you can strengthen business resilience in these challenging times.
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[i] Grant Thornton’s International Business Report (IBR)
[ii] CNBC.com: Global CFOs more negative on economy and expect big coronavirus hit to their company in 2020: Survey - 1 June 2020.
[iii] grantthornton.global: Thriving in 2020 - February 2020.