Startup Founders’ Quick Guide to COVID-19 Business Risks

Managing business risks in times of high volatility

Code red was raised by the Philippine Department of Health (DOH) on 7 March 2020 (see link) as the country’s risk of local transmission of the novel coronavirus (COVID-19) heightened with local cases in key cities of the country. Whilst the number of confirmed cases remains around ten as of this writing, managing employee hysteria amidst expected rise in number confirmed cases of patients will prove challenging for startup founders and micro- small- and medium-sized enterprises (MSME) business owners in the coming days.

While the immediate business risks have not impacted startups and MSMEs much over the past four months since the virus was announced last December 2019, the proclamation of local cases and the raising of code red by the DOH over the weekend are expected to be a big game changer for the smaller players in the economy.

This quick guide aims to address some of the key issues expected to arise and how founders and business owners need to prepare for them over the coming weeks. This is not aimed as a complete business continuity plan for startups and MSMEs and is limited to key business risk areas.

Code Red and declaration of state of public health emergency

The proclamation of Code Red does not carry a direct impact to businesses but is addressed to concerned government agencies to prepare and be ready to implement planned response measures in line with DOH guidelines.

As part of this, the DOH has also recommended the Office of the President to declare a State of Public Health Emergency which will allow concerned government agencies to mobilize government funds with lesser bureaucracy for faster actions to address any funding gaps needed to address and contain the local transmission of the virus.

This said, whilst the declaration of code red and a recommendation to declare a state of emergency will not have a direct business impact, the indirect business impact is expected to be highly unfavorable considering the growing hysteria over contagion of the disease in workplaces and key locations in the country.

Startups and MSMEs are likely the most economically vulnerable businesses in these volatile times and founders need to be highly strategic at this point to avoid losing control of the business before the tide goes down. Here’s a few key business risks that companies have to prepare for in the coming days and weeks:

Employee absenteeism

With a high contagion rate and current known infected locations within key business areas of the Philippines together with the announcement of Code Red by the DOH — employees, especially those working in high risk areas or functions (e.g., office buildings, front desk or recruitment), will likely consider the health risk of going to work in these times.

Other than absenteeism, employees engaged in higher infection risk areas (e.g., public transport, malls, etc.) might consider abandoning work to minimize contraction risks.

Infection event

An infection event occurs when an employee contracts the virus, confirmed or suspected, such that the workplace needs to be disinfected and employees will be home quarantined (unless otherwise required by the DOH in the future) for trace testing. In this likely event, business’ operations will automatically shutdown and transition into telecommuting arrangements to avoid business disruptions.

Companies not prepared to shutdown and transition to prolonged telecommuting during an infection event are likely to suffer financially.

Commercial losses

During these periods of heightened fear of contracting the virus, many service businesses and establishment-based businesses are starting to feel the slump of consumers foot traffic in key commercial areas. Further, with the cancellation of most planned holidays in the Philippines, businesses that rely on tourists will have to seriously plan ahead.

Supply chain disruptions

Companies that depend on imported materials (e.g., raw materials or finished goods) have suffered from production delays as China has halted many manufacturing operations to minimize the contagion risks in megafactories within China. With the virus expected to last over several months, businesses with high reliance on imported products will have to manage their supply chain risks.

Cash flow risks

One of the biggest risks that smaller companies with unstable cash flows is to manage the limited working capital currently available matched with a fast cash burn to payoff operating expenses during these volatile times. With a looming potential to fully halt business operations, companies will have to be prepared for sustained cash outflow amidst low cash inflows.

Effective communications in times of crisis

No company is ever fully ready to face a crisis and contagion related crisis is a phenomenon that businesses have limited experience (considering the last major contagion related crisis was related to SARS in 2003) in navigating. Ensuring timely, concise and transparent business communications to all stakeholders will be important in these volatile times.

Companies will need to be prepared to communicate any known risks to all employees of the Company and ensure that any infection event triggers the right organizational response to minimize further contamination in the workplace. Throughout the quarantine period, companies will need to exercise due care and diligence in communicating the next steps to all employees.

Together with managing internal stakeholders, managing public stakeholders through clear communication plays an important role to minimize the negative publicity for the infection event of the business. Ensuring that external stakeholders such as investors and customers are onboard with the actions being taken by the management establishes the necessary trust needed by the business.

Adopting “flexible” working arrangement

With a purview of the negative financial impact of COVID-19 on Philippine businesses, the Philippine Department of Labor and Employment (DOLE) has taken an active step to avoid mass employment losses in the country resulting from retrenchments and redundancies that companies normally take during periods of financial distress.

On 4 March 2020, DOLE issued Labor Advisory №9 (see link) providing the implementation guidelines to urge companies to adopt a flexible working arrangement in lieu of termination of employment through retrenchments and/or redundancies. The last similar issuance by the DOLE was way back in 2009 during the global financial crisis of 2008.

Under the said Labor Advisory, DOLE is encouraging businesses to adopt work reduction schemes to minimize labor costs while still retaining the employees such as:

• Reduction of working hours or working days — this effectively reduces the employee’s working hours from the standard 40 hours a week, subject to an agreed pay cut for the reduction of working hours or days
• Rotation of workers — normally adopted together with reduction of working days, which normally is implemented such that a group of employee works on Monday to Wednesday and another group works from Thursday to Saturday
• Forced leave — this allows employees to go on weeks or months of unpaid leave, after fully consuming their holiday credits

Do note that flexible working arrangement being discussed in this section pertains to DOLE’s definition of flexible working arrangement (i.e., working hours reduction, forced leave, etc.) rather than the common use of the term for businesses (e.g., telecommuting, work from home, etc.). Whatever scheme the company may decide with, this will need to be agreed first with the employees and filed together with the necessary report to the DOLE.

Adopting telecommuting schemes

To minimize the contagion risks of the disease in the workplace, companies recently with confirmed cases of COVID-19 employees have taken an initiative to allow employees to work-from-home or telecommute. Many startups and businesses have already adopted this scheme as part of their business-as-usual but the dynamics of working-from-home can be different when adopting such schemes on a prolonged basis.

Preparing for a prolonged telecommuting scheme will require development of written policies to document how office-based policies can be adopted to work-from-home arrangements such as time-in and attendance. More than a written policy though, a critical success factor for a working prolonged or permanent telecommuting scheme is the provision of the necessary tools for the employees to continue working without going to the office.

Necessary tools will depend on the employees’ nature of work and how work can be done effectively and normally includes hardware, software and internet connection components. Hardware components such as laptop (especially for businesses that rely on desktop computers), input (e.g., keyboard and mouse) and output (e.g., printer and second screen) devices and headset will normally be necessary together with software components (e.g., collaboration tools and productivity tools) and internet connectivity will normally need to be provided to the employees.

Considering these factors, businesses need to make sure that budgets are ready to enable employees to work-from-home with minimal friction to lessen operational disruption on the business.

What’s next?

Most startups and MSMEs are generally not ready to shift into a prolonged telecommuting arrangements and will face operational challenges when the need arises. Business will have to immediately simulate and stress-test their business model and operations and prepare for a potential immediate need to shift to a telecommuting arrangement assuming a workplace contamination occurs within the week.

While developing business continuity plans at this stage and contagion rate is not realistic — the following immediate actions will need to be taken by founders and business owners:

1. Stress-test and simulate a contamination event within 5 calendar days to determine the optimal next course of action, this would normally require the involvement of key persons within the company across the ranks to ensure that plans in place are realistic and can be executed.
2. Stress-test and simulate the company’s profitability and cash flows using pessimistic assumptions relevant to the company such as a total stoppage of the supply chain, a 90% drop in walk-in customers, a shutdown of local banks limiting monetary access to ATMs, and other relevant assumptions.
3. Stress-test and simulate an infection event of key persons and founders within the company to determine how the business can continue to operate in the absence of these key persons on a prolonged period of time.
4. Develop short written policies that will be deployed to all employees in a contamination event and how telecommuting arrangements will be followed. This should likely be developed together with key persons of the company as well as human resource specialists.
5. Check the company’s medical insurance (or health maintenance organization) policy and employment contracts to ensure that affected employees are provided with the right medical attention and monetary compensation as legally required. Some insurance companies have begun to introduce additional benefits to policyholders in light of COVID-19.

In times of contagion crisis, business continuity is more important than growing the market base of the business (exception to those in the business of crisis management, medical research or other relevant industries). Businesses are expected to cut-down operating costs during these periods to avoid spiraling down into bankruptcy in these volatile times.

After all, we can never be fully prepared to face all the risks that are yet to come in the coming days — we can simply hope and pray that all will be well and we can ride the tide.

About UpSmart

UpSmart is the premier financial consultancy firm in the startup, SME, and social enterprise industry. UpSmart specializes in strategic finance (e.g., structuring and restructuring of legal entities, valuing and modelling companies, serving as chief financial officer of companies) and operational finance (e.g., optimizing business processes and controls, accounting and bookkeeping support, financial reporting and analysis).

About Filbert

Filbert is the co-founder and managing director of UpSmart. He leads the consulting practice of UpSmart and specializes in handling corporate structuring and financial transformation projects. He was previously a consulting manager at Ernst & Young in the UK. He writes for Tech in Asia, Business Mirror and serves as a mentor at The Final Pitch on CNN.