COVID-19: The case for a comprehensive risk assessment and response

The ongoing spread of the Coronavirus (COVID-19) has created a myriad of unique challenges for corporate Australia. Most organisations (including state and federal governments) are currently focused on supply chain dependencies and re-writing internal policies “on the run” but all will benefit from a more comprehensive risk assessment and a structured response.

Ongoing business and travel disruptions are creating severe supply chain related headaches for Australian businesses.

The spread of the virus from China to other countries, including neighbouring ones, means that it is not only businesses with China related supply chain exposure which are being affected. These supply side shocks are increasingly impacting earnings and cash flows for businesses across a broad range of industries, not just in the tourism, education, retail, manufacturing and transportation sectors.

Many businesses with adequate supply coverage for the next month or so are becoming less confident about the longer term. There are more ‘unknowns’ than ‘knowns’ at this time, including the length and severity of economic disruption as a direct result of the virus, and the medium and longer term impact on demand and economic growth.

Businesses of all sizes need to be proactive in assessing and responding to the business risks associated with COVID-19, both internal and external, direct and indirect.

Proper governance dictates a comprehensive Board led (Risk Committee) response which incorporates:

 

Establishing a cross functional project team to develop and oversee implementation of defensive strategies, including running mock COVID-19 business continuity and disaster recover scenarios.

   

Sourcing reliable and up to date information, free of political, economic or journalistic ‘spin’. Where China is concerned not all of the publically available information is being reported internationally.

             
 

Completing a comprehensive base case risk and exposure assessment, addressing all potential financial, operational and governance related risks.

   

Updating financial forecasts and related operational planning for conservative base case and downside scenarios (including worst case).

             

Businesses should also leverage COVID-19 learnings into longer term opportunities to de-risk supply chains and business models. Like all Black Swan events the implications of a virus pandemic will have been foreseeable in hindsight. Plans for alternate, dual or contingent sourcing may warrant further development and should be considered for all global supply chain elements, since future disruptions may occur in any country and originate from geopolitical, disaster related or pandemic related events.

Risk assessment focus areas

 

Supply side risks

  • Review expected impact on offshore suppliers (including in geographies not yet impacted) and assess the impact of potential delays to orders of raw material and/or inventory.
  • Assess exposure of domestic suppliers and adequacy of contingency plans.
  • Develop plans for alternate supply and/or dual sourcing strategies.
     
 

Demand side risks

  • Consider potential impact on demand of both actual virus impacts and consumer reactions and sentiment. The corollary of panic buying of “essential items” is likely to be deferral of discretionary expenditure.
  • ‘Lead’ indicators such as surveys of business and consumer confidence and future intentions may be more reliable than ‘lag’ indicators based on historical data which pre-dates the outbreak.
     
 

Forecasting risks

  • Updating short and long term forecasts is critical but presents challenges given the higher than usual level of business uncertainty. Preparing forecasts where key variables can be ‘stress tested’ for various scenarios to assess possible impacts on earnings and cash flow is therefore critical.
     
 

Cash flow impacts

  • Understand and seek to mitigate working capital challenges and the impact on cash flow, including any slow paying or distressed suppliers / customers and consequences of under or over stocked inventory levels.
  • Critically review forecasts for cash conservation options, both internal and external.
  • Give early consideration to available sources of additional capital (if required). Dry powder may become business critical.
     
 

Key contract risks

  • Review key contracts with counterparties and plan for any impacts of late supply of materials or products.
  • Consider the risks and opportunities of either party enforcing key terms, including the legality and impact of enacting force majeure clauses.
  • Identify any potential issues with your own ability to honour contractual commitments.
  • Review and understand all relevant insurances and exclusions.
     
 

Earnings related risks

  • Consider continuous disclosure obligations and earnings guidance implications after forecasts are updated.
  • Revisit bank covenant calculations using updated stress tested forecasts, assess covenant headroom and engage with lenders proactively to seek dispensation for one-off ‘normalisation’ impacts if necessary.
     
 

People impacts

  • Clarify, communicate and update (i) travel policies / restrictions, and (ii) OH&S policies and protocols in the event of staff illnesses and/or required virus contagion management strategies.
  • Revisit disaster recovery plans, including the capacity to support remote working for an extended period.
  • Critically assess the ability for alternative staff to cover key roles and the need to train back-up staff to cover critical roles or tasks.
  • Assess the need for interim resourcing and expertise in the event of illness of absence of key personnel.

AUTHORED BY

Andrew Wharton

Andrew Wharton
Director, Melbourne
T: 03 9038 3159
E: awharton