The other day I heard the term EBITDAC (earnings before interest, tax, depreciation, amortisation and Coronavirus). It made me laugh, then I realised that as the new era ‘AC’ (After Coronavirus) kicks in, we seriously need to adjust our financials to avoid triggering defaults on loans, justify the new numbers and dividend suspensions to Boards and Shareholders, and for accessing Government support packages, etc.
I have long banged on about the importance of having good liquidity. The current ratio (liquidity ratio measuring working capital) for a business indicates a company’s ability to pay off its debt obligations and is an indicator of good financial health and ability to endure financial hardships. The higher the ratio, the better the ability.
In my career I have been privileged to judge business awards, work with many SMEs and evaluate dozens of tenders where we have looked closely at financials to support sustainability. One thing that has always troubled me is the liquidity of New Zealand business. I cannot recall many situations where the current ratio was in excess of 1.2 (the minimum ratio deemed healthy).
Now please don’t align my views with those recently given by an MP who stated to the COVID-19 Epidemic Response Committee that “We are seeing a number of small businesses really struggling after only a few weeks in a pretty bad situation, which must speak to the strength of those small businesses going into this lockdown”.
Throwing this criticism after the global impact and response to Covid19, which as per the cliché has certainly been unprecedented, in my personal opinion is a bit rich and surprising. What the MP has failed to consider is that even those small and large businesses who are in a healthy liquidity position have equally been gazumped by COVID-19. Like a Francis Ford Coppola mobster movie, it has created a perfect storm where your assets have been ostensibly frozen, and you are powerless to do anything to fix it. Basically:
- You cannot sell. It has directly disrupted the circulation of capital not only nationally, but globally; not only B2B but B2C.
- You cannot borrow. It has severely limited the ability to secure capital from banks in the form of loans.
- You cannot make. It has directly disrupted the ability to generate capital by manufacturing stock.
- You cannot quit. It has directly disrupted the ability to generate capital by selling of assets such as plant and machinery.
So as we rebuild – and I recognise some of us will be victims to coronavirus, my heart goes out to you – we will need to consider far more seriously how we manage our net-debt ratios, in particular over the next 12-24 months where we will see increased volatility.
We need to urgently find different ways of working focused on maintaining strong liquidity in our businesses. And the companies who do this well will create their own
financial sustainability, and be the solid base of New Zealand’s new prosperity in the post-Coronavirus world.
This is the new key to survival and the best way to avoid a prolonged economic crisis.