Capital lessons learned from the crisis

Steps for the journey

The pandemic tested the resilience of companies, global financial systems and wider capital infrastructures even drawing-in state governments. The learnings will equip us to thrive in the future.

The first and perhaps most striking lesson we learned from the financial impact of the pandemic was that global infrastructures proved to be significantly more resilient than we might have expected. Everything didn’t implode like it would in a Hollywood movie! Companies in sectors like travel and hospitality, despite having had most of their revenues switched-off overnight, have still survived. Rather than collapsing, they moved quickly to minimize costs and went into hibernation sipping life-support capital either from their own reserves, networked stakeholders or, ultimately, received government sustenance.

A condition of government involvement, of course, has been the removal of the insolvency option without the chance to cut and run. Shareholders are obliged to focus on preparing for the long-term with renewed vigor. Elsewhere, many organizations learned that they were actually more capable of agility under stress than they had imagined and quickly adjusting to radically different working conditions while containing costs and spending. Capital bases also proved to be more resilient than expected, with companies finding innovative ways to cushion their short-term finances such as raising equity finance against assets. 

Finally, we were reminded that the markets instinctively crave a prosperous outcome in the long-term and are inclined to remain fundamentally optimistic, even if full economic revival is delayed further than they might have hoped. But there is no room for complacency, not all organizations have survived. The pursuit of resilience is vital for everyone in an uncertain world. It means having the vital tools to thrive in the face of adversity, to maintain confidence and encourage hope, whatever the future holds.

Capital bases also proved to be more resilient than expected, with companies finding innovative ways to cushion their short-term finances such as raising equity finance against assets.

What’s changed?

In some ways much appears unchanged since before pandemic. As we discussed in our paper on continuity and financing, the basic disciplines that underpin business and capital planning remain predominantly unaffected. Well-managed organizations still need to define and commit to a robust business strategy, set realistic forecasts then communicate regularly and clearly with stakeholders. They need to implement according to their promised plan, remembering that, at least from a financial perspective, cash is king. What has undoubtedly changed though, is the operating context within which these actions are applied in practice. This means placing greater emphasis on the knowledge and strategies that the resilient organization now needs to recover and thrive as it ventures into a less certain future.

The next normal

Disruption to businesses across the world has not been evenly distributed. Some have been devastated while others have been dealt a helping hand by the pandemic. Most fall somewhere between these two extremes. The future operating environment is likely to be hesitant at best, fear of the virus is likely to persist, at least subliminally, in most markets for some time yet. It is possible that consumer behavior might never return to the pre-pandemic ‘normal’ and that we must start to acclimatize ourselves to the ‘next normal’. This means taking stock of the changes that have redrawn the operating context then reshape and restructure the organization to take maximum advance of them. Prevailing trends need to be monitored and the operating models and capital structures kept as flexible and responsive as possible to reinforce and maximize resilience to unexpected change. 

Greater interdependency

Most resilient organizations have given themselves additional financial liquidity during the uncertainty of the crisis and will need to maintain a tighter grip on cash during the next normal. While governments across the world have been recognizing and ameliorating the impact on business as far as possible, some key suppliers and customers could still be struggling and might yet fail. For this reason, all partners in the value chain should be monitored. 

Above all, there is an opportunity to develop more open, trust-based interdependencies which leverage the respective strengths of every expert in the chain, as well as identifying and rectifying any potential weaknesses it that might have been overlooked in the past. Given the uncertain financial challenges that lie ahead, robust capital planning will more important than ever, so clear, proactive communications with financial stakeholders will be vital. Greater interdependency will also extend to specialist external partners, whose focused skills can be leveraged to accelerate business transformation. This will free the resilient organization to focus on its own strengths and develop the agility it will increasingly need to thrive and grow in the next normal.  

Deloitte’s global reach and breadth of capabilities across all aspects of capital management is helping guide many organizations through the uncertainties of the current era and build their resilience to face the future with renewed confidence.

 

Resilience

The global pandemic has prompted even the most resilient of organizations to review their activities and seek out areas of improvement for the future. Targeting the right customers with the right products is difficult enough (especially when both keep changing), but not having the investment in place to undertake organizational change (from resizing and digital transformation to cultural or environmental change initiatives) or failing to maintain adequate reserves (or lines of credit) should another unexpected issue arise, will be just as critical in keeping resilience at full strength.

There are three essential steps in developing financial resilience:

1. Where are you now?

  • Interrogate your current situation thoroughly. Lift the lid on every cost center and review the financial health of every supplier and customer (as well as further up and down the supply chain if possible).
  • Recognize and own your current situation. Be honest even if things don’t look good, at least you will know where to focus.
  • Identify the issues you need to fix. List and prioritize them.

Three essential Steps in developing financial resilience:

1. Where are you now?

2. Where are you going?

3. How will you get there?

2. Where are you going?

  • What is your new vision for the future? Not a re-heated pre-pandemic one but a vision that fully takes stock of the change that is currently and will continue to challenge the resilience of your organization.
  • Define your mission and prepare to tell your story. If you have a direction that makes good commercial sense and which people can buy into, they will commit finance and investments.
  • Think about your long-term horizon, not just your short-term one. A ten-year perspective might not help you in the next 18 months, but it will enable you to think more shrewdly about investing in sustainable growth.

3. How will you get there?

  • What practical steps will you take to close the gap between where you are today and where you want to be? What capital milestones do you have on your journey? How often do you plan take stock of your evolving financial needs as you progress?
  • Having plotted your course, what are the levers you can pull to enable it to happen as quickly and efficiently as possible? Look at a turnaround as a transformation. This might be through a targeted exit or acquisition which recent events might have highlighted.
  • As mentioned earlier, we are in now in an era of expanded collaboration networks of focused experts doing what they all do best to solve the biggest challenges faster, cheaper and with less capital risk. Are you leveraging the best options available to you?

Financing your future 

Resilient organizations need to have robust and realistic business and capital plans.

One of the most effective ways to achieve this is to use scenario-based forecasting to identify potential financial challenges in a range of different scenarios. These can vary enormously depending on where the organization is on its recovery curve: Perhaps it is tentatively emerging from hibernation? Or it might be bouncing back comparatively unscathed? It might even have benefited from the pandemic and be looking to consolidate as things calm down?

Wherever the organization is on its recovery curve, the unprecedented scale and speed of the crisis have stretched many established financial controls to the limit. This has led to a relaxation in market disciplines, regulations and governance which has, in turn, undermined confidence in these institutions as they resist being exploited by the unscrupulous as well misunderstood by the unfamiliar.

Trust is, therefore, a top priority for the future if governments and companies are to make swift progress on the recovery curve. The government needs to be able to trust companies not to exploit or take unfair advantage of short-term financial measures it is offering while companies need to be confident that the government has their best interests and that of the wider economy at heart. For the recovery to endure and the resilient company to thrive, both must be founded on trust.

Deloitte has some of the worlds most respected scenario planning capabilities and, thanks to our end-to-end capabilities across all disciplines from strategy to execution, we can provide a holistic perspective and proven solutions to maximize the potential in every scenario.

The government needs to be able to trust companies not to exploit or take unfair advantage of short-term financial measures it is offering while companies need to be confident that the government has their best interests and that of the wider economy at heart.

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Andrew Grimstone

Global Turnaround & Restructuring Leader