The rapid spread of the novel coronavirus has sent governments, markets, and communities worldwide on a fervid search for answers—how long, how many, how much? Investors, too, are seeking facts about, among other things, how the global pandemic is affecting business operations, what companies are doing to protect employees and suppliers, what companies’ recovery plans entail, and whether companies have enough liquidity to withstand the pandemic. The markets are volatile, so companies’ responses to these queries could carry considerable weight with critical intrinsic investors and materially affect companies’ recovery plans and capitalization. To address investors’ immediate concerns and reset their expectations, CFOs and other senior business leaders should be prepared to answer the following questions.
What exactly is COVID-19 doing to your business?
Be prepared to give investors a clear and detailed accounting of all the ways the pandemic has affected business operations and financials. This is clearly not business as usual. Depending on the industry, the company may be experiencing severe supply-chain issues—think of the unexpected peak demand for medical supplies and the parts shortages because of factory closures. Or the company may be facing a deep decline in demand for products or services because of quarantining and shelter-in-place mandates, as we’ve seen in tourism and hospitality.
To help investors put commercial and operational disruptions into context, CFOs should perform diagnostics on company demand and supply and give investors a preliminary outlook on each. It would be helpful to provide investors with a breakdown of revenue and EBITDA by region, with a comparison of numbers from these markets before, during, and after the virus. What earnings-recovery measures have been implemented in which regions? Are competitors taking similar or other actions? Sharing this information with investors can demonstrate that senior leaders are attempting to stay ahead of the curve and anticipating impacts from the coronavirus across all regions, even those that haven’t been severely affected yet. CFOs should also prepare a few scenarios, from conservative to worst case, to suggest how the company expects business performance to unfold and how the company might respond under each circumstance.
What specific actions are you taking to protect the business?
It is important to acknowledge the ways in which the company is heeding and communicating the advice of leading healthcare organizations, such as the Centers for Disease Control and Prevention and WHO. It is also critical to clearly outline the direct steps the company is taking to keep employees, vendors, suppliers, and other key stakeholders safe and healthy in the wake of COVID-19, whether that involves providing health support to those affected, mandating that employees work from home, or monitoring the actions and safety of vendors, suppliers, and those who cannot work from home. It can be helpful to provide general time frames for when employees may return to work. Investors should also be reassured that the company has established a clear business-continuity plan, including contingencies for leadership succession should senior executives contract coronavirus (particularly those over age 60). Such plans will obviously look different depending on company and industry. Additionally, it would be helpful for investors to know that a central nerve center has been established to coordinate liquidity forecasting, strategy and operations, and the mobilization of recovery measures.
Does the business have enough liquidity to survive?
Investors need a detailed description of the company’s liquidity position, explaining how well the company could withstand a prolonged downturn as well as how decreased earnings could affect any refinancing plans or other major long-term decisions. The CFO should set the context properly—providing a sense of what the liquidity position is now and where it may be in three months, six months, and 12 months. If there are concerns, the finance leader should share them up front. Investors need to understand how the company plans to generate cash in this period of uncertainty. Depending on the industry, the CFO and finance team may need to weigh options to divest assets, delay capital expenditures, reduce working capital, or deploy cost-cutting programs. It is important to share those options and the timing of their implementation with investors, as well as the logic for why the company has decided to emphasize one course of action over another. Conversely, if the company has high levels of cash, investors should understand what the capital-allocation plan will be. Given the current market, CFOs should not be surprised if investors express their preference that excess cash be returned.
Critically, the CFO should describe in detail for investors the internal and external resources the company may access in this time of crisis, even if just as a precaution—for instance, government aid, credit lines and commitments from banks, potential sale of real estate or other assets, or expediting any established cost-cutting or restructuring programs. Conversely, if the company is fortunate and operating from a position of strength, it is helpful to share with investors any bold plans to seize opportunities that may appear during the crisis period. The CFO must convey the company’s preparedness for a range of possible outcomes in these discussions; investors will be looking for signs of critical thinking.
Can you provide estimates?
If guidance assumptions have changed as a result of COVID-19, share that information—and describe the challenges in thorough detail.
Report to investors any changes in the company’s capital-allocation plans, particularly any changes in policies for dividends, capital expenditures, and M&A. It is not prudent to offer predictions for the rest of the financial year. In uncertain times like this one, promising a bottom-line number for next year’s earnings can raise questions about how the company will get there. The “how”—or the actions you are taking—will be far more important to investors than the actual numbers.
If guidance assumptions have changed as a result of COVID-19, share that information—and describe the challenges with the same level of detail you would use during your company’s Capital Markets Day, in which the nitty-gritty of strategy and business-development plans take center stage. Remember that it is better to be conservative in your messaging: it is always easier to deliver unexpectedly good news to investors than to ask them to revise high expectations downward. Plus, the options available now, as the pandemic evolves and before the full economic impact is felt, will likely be more palatable than those available later.
Particularly in times of crisis, it behooves CFOs and executive teams to show leadership and to be transparent with investors about all bad news and potential risks. It is critical to communicate quickly about tough decisions—for instance, cost reductions or facility closures—to ensure that investors, employees, and customers see leaders taking clear, resolute action to right the ship.