Business

COVID-19: Business Resilience Tips for SMEs

By CPA Charles Lutimba 

The impact of COVID-19 is being felt on a global scale. The pandemic has led to a severe contraction in economic activity due to a combination of global supply chain disruptions, travel restrictions and the sudden decline in demand. Most Uganda produce is exported to overseas countries, therefore, if countries are closing borders and instituting stringent measures, Ugandan businesses are heavily impacted.

Businesses are also facing reduced productivity as many workers struggle to reach workplaces owing to mobility restrictions and safety concerns.

Small and Medium Enterprises (SMEs) contribute over 70% towards Uganda’s Gross Domestic Product (GDP) and over 90% employment opportunities. Therefore, when SMEs suffer, the entire economy suffers.

Many SMEs are sustained by bank loans which have to be serviced periodically. With the current situation, many SMEs will not be able to service their loans. Stagnation in loan repayment will cause banks to suffer. As a result, there will be an increase in bad debts and this will affect liquidity.

Cash flow is the lifeblood of a business – it is like the heartbeat of any business. It pumps in and out and has to be monitored diligently. When it is not working properly, it can threaten the viability of the business. Its absence affects operations immensely. It affects mundane and critical business operations ranging from salary payments, and other operational costs, among others. This in turn affects demand for goods and services and the general flow of cash within the economy, hence a recession.

A number of economies have since revised their economic growth projections with the Ministry of Finance envisaging Uganda’s economic growth slowing to 5.2% to 5.7% in 2019-20 from an earlier forecast of 6% depending on the severity of the impact coronavirus pandemic.

As a result Governments all over the world have come up with  robust fiscal responses aimed at ensuring macro-economic stability by taking measures aimed at  resuscitating their businesses and households through programmes such as corporate finance working capital (to avail businesses with working capital, for example through soft loans), mortgage and rent holidays.  As the business community waits for the Government to fully activate its deliberate polices to ensure that the economy is not much affected, Uganda’s central bank cut its policy rate by 100 basis points to 8%, with the authorities saying the ongoing outbreak of the COVID-19 disease had depressed economic activity. At the moment the business community needs to be versatile if they are to remain afloat. Among the key aspects to note include the following considerations:

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Ensure prudent financial management to ease the cash flow burden: The role of the accountant is critical here. Cash is critical at this time, and accountants should institute measures to protect the liquidity of the business. Such measures may include: ensuring central management of resources, prioritizing expenditure to essential expenses, reducing cash outflows through cost reduction and delaying payments. Delay of payments should be well handled through communication with suppliers. Consider deferring capital expenditure such as building, maintenance and property costs. Also consider applying for short term credit, to cover any deficiencies.

Embrace Innovation and automation: Businesses should explore innovative ways to reach customers, for example through digital channels. Invest in digital infrastructure, to support e-commerce.

Ensure the safety and wellbeing of employees through facilitating remote working and flexi working schedules. Institute safety measures at the business premises and provide protective gear to onsite staff. If staff feel protected, they are likely to be more productive. Practice regular and transparent communication. Consider options for leave and where layoffs become inevitable, they must be executed within the legal framework.

Take Advantage of amnesties

The National Social Security Fund has granted an amnesty to businesses to reschedule social security contributions for the next three months effective 31 March 2020. Businesses facing cash flow challenges should apply for this amnesty, to protect liquidity, while avoiding penalties. Also take advantage of extensions of tax returning deadlines as guided by the Uganda Revenue Authority.

Renegotiate Contracts

In moments of uncertainty, businesses will wish to escape existing contractual obligations by seeking to excuse or delay performance under contracts based on force majeure (common-law doctrines that could arguably justify what would otherwise constitute breach). A number of contracting parties anticipate unforeseeable impact on their ability to perform by including an express force majeure provision in their contract. A force majeure provision premises that a contracting party is not responsible for its violations of the contract, including delayed performance, to the extent due to events not within the reasonable control of the party. However, how broad or narrow the force majeure provision is drafted will determine whether COVID-19 or the impacts thereof amount to force majeure. Whereas force majeure clauses include broad catch-all provisions, even a broadly worded provision may not excuse performance unless the force majeure clause makes some specific reference to the event at issue. Seeking legal advice may be handy but we encourage businesses to consider reviewing and or revising terms and conditions, in light of their obligations as per the existing contracts.

Respect Government Guidelines: Keep abreast of communications from the government and adapt businesses operations accordingly. Adhere to the directives, to avoid unnecessary penalties and other punitive action that might put the business in further jeopardy.

Supply chain management is key

Maintain regular communication with supplies, to ensure steady delivery of goods and raw material. Secure alternative sources of supply and obtain substitutes for out-of-stock products.

Customer Relations and Marketing

More than ever, maintain brand visibility before your target audiences. Many businesses have temporarily closed shop, therefore, it is important to keep customers aware of your services. Communicate regularly with customers and inform them of delays. Ensure the safety of customers at the business premises, through adopting the Ministry of Health guidelines. This is a good time to dig up that client database and reach out to clients individually. Call clients or send sms to inform them of how you can provide services and products.

Activate the Business Continuity Plan (BCP)

In the current situation, it is vital to react as fast as possible in order to mitigate impact and other risks and to prepare the business for the further development of the COVID-19 pandemic and its possible impact. Businesses should consider to have in place the required infrastructure, cyber, employees, business, operational and communication utilities, with the aim of managing the new challenges and risks but also ensure continuity of operations and production. The BCP should enable the business to activate its strategic and operational framework to increase resilience with the ultimate objective being the prevention of suspension of operations or services.

 

Carry out risk assessment

With this pandemic, entrepreneurs are advised to perform a risk assessment and put in place clear policies and procedures to protect their business and the people within from contracting and spreading the virus. The risks should be assessed in how they specifically relate to one’s business. The level of risk may differ depending on the staff one has within their premises, the nature of their movements, existing infrastructure, and extent of contact with clients, among others.

Insurance and financial recovery

Some businesses have business interruption insurance; this is the time to contact your insurance agent to review your policy to understand precisely what you are and are not covered for in the event of an extended incident. Some lines of insurance such as health, workers’ compensation and life will most likely have covered claims with respect to COVID-19. However, for a business that may not have had this cover, this should be a learning moment going forward.

Lessons for Micro Enterprises (1-4 employees, UGX 0-10 Million in assets)

Business Formalisation: Micro enterprises should prioritise business formalisation to improve their identity. This makes it easy for a business to apply for support, for example, credit facilities in the face of distress. Formal businesses may also get Government support whenever circumstances dictate.

Risk Management: Micro enterprises also need to carry out some risk assessment. This should be intended to enable them stay in business while keeping their staff safe. Focus should largely be put on implementing directives as communicated by the authorities as failure to do so may result into closure of businesses or penalties.

Consider diversification: Entrepreneurs should consider venturing into more than one line of business, to avert risks associated with keeping all eggs in one basket. In the event of a crisis, when one line of business stalls, the other business can keep the enterprise running.

Improve Financial management: Businesses should distinguish between capital, profit and savings. They should consider hiring accounting technicians or professional accountants on part time bases, to assist with bookkeeping.

Build a strong savings culture: Business savings will keep an enterprise afloat in the event of a crisis. Micro enterprises should develop the habit of regularly saving a proportion of their profits.

Joining Trade Associations: Trade Associations are very important in galvanising any lobbying that may be required by businesses. Imagine micro businesses through their representatives were to meet providers of credit or even the tax body, regarding issues pertaining to say extension of credit time lines or return periods, we believe this would be more tenable than when each one of the thousands of micro business entrepreneurs was to do it on their own. The adage of ‘in unity we build strength’ is a testimony here as Trade Associations would help to increase the bargaining power of micro enterprises.

Client relations: Many micro enterprises deal with one-time clients. Micro enterprises should grow a custom of establishing long term relations with customers, with the aim of transforming them from customers to clients. They should create a database of clients’ contacts. This eases business continuity in the event of crises that inhibit mobility of customers.

The COVID-19 pandemic is not the first one and may not be the last one. Businesses should thus have a clear policy on how to handle such emergencies. There should be no one approach suitable for all circumstances. Whereas we may encourage being technologically apt or even social distancing, our call for businesses to be innovative and prepared for the unknown should be the ultimate test that would determine sustainable businesses for the future. Imagine, today’s pandemic may affect our health, restrict human movement and interaction but who knows, tomorrow’s pandemic may be one that may curtail online communications. Be prepared.

This article was compiled by CPA Charles Lutimba – Manager, Standards & Technical Support, and Nancy Akullo – Head of Communications, of the Institute of Certified Public Accountants of Uganda (ICPAU).

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