As we know that the whole world is encountering an inconvenient time on account of the CoronaVirus outbreak and since our whole country has been under lockdown since 25th March 2020, the weight of the downturn is more on the business than the weight of Coronavirus a tremendous number of Indian associations are unclear about their future.
Further, the International Monetary Fund (IMF) anticipated a GDP development for India by 1.9% for the year 2020 in light of the fact that the worldwide economy is influenced by the COVID-19 pandemic. The Economists expect the Financial year that started in April 2020, will see the most noticeably awful financial recession in 40 years.
Karthikeyan V. Raaj, Founder, Finpreneurs Consulting LLP views for portfolio companies on ways to manage the resources during this pandemic are:
- Conserve cash, prepare for dying of equity funding
- Exercise judgment on cash collections and payables. Renegotiate credit period with large corporate and route that to smaller paying vendors
- Receivables - Consider offering discounts to customers to expedite collections
- Defer GST payments in line with Government announcements
- Actively engage with banks for debt financing - starting early would avoid crowding out
- Negotiate interest rates and/or refinance debt to limit any credit rating impact
- Look for Government grants for startups in specific sectors
- Explore CSR funds depending on your business’ ability to map to COVID-19 crisis
- Evaluate bill discounting options like TReDS to enter into contracts potentially
- Review cash and evaluate fixed costs. Reducing salary costs across all levels, while communicating the underlying reasons transparently
- Consider equity-based compensation, if possible review office space and rental costs
- Freeze hiring and engage external part-time support wherever needed
- Cut down inventory even if it’s at lower margins
- Defer R&D expenses unless core to the business
- Leverage digital medium to reduce sales and marketing expenses
- Tightly control Customer Acquisition Costs (CAC)
Karthikeyan says, “In general, companies are downsizing their headcount or reducing the salary costs anywhere by 30% to 50% to manage during the economic slowdown.’’ In some cases, companies have not made any payouts last month. Having said this, leveraging on opportunities related to COVID, wherever possible is essential.
For example, one of our clients who were into apparel manufacturing was severely affected due to the lockdown. Luckily, they had access to the machines that are utilized for manufacturing PPE. So they jumped at the opportunity and now they have a long order book, running at full capacity and also received certain advance payments. ''This was something that the promoter would not have anticipated at the start of the crisis,” he says.
Karthikeyan also sets a few points for the portfolio companies to follow:
- Re-do the 2020-2021 financial plan. Revisit assumptions on sales pipeline, Loan to Value, customer churn and customer acquisition cost metrics
- Prepare a 12-months cash budget from your projected Profit and Loss statement
- Perform scenario analysis with cash budget considering recovery over 3, 6 and 9 months (best, base and worst cases with Approx 20%, Approx 40-50%, and more than 50% fall respectively)
- Define the top 3 financial metrics and set realistic targets (eg- 12 months) in line with the base case, eg. revenue per employee, operating profit per customer, etc.
It is critical to have adequate savings to run a family and meet commitments first for at least 2 years. Then comes the question of when the first revenue and salary from the venture starts flowing. One needs to perform scenario analysis to be aware of the possible timelines, best-case, and worst-case scenario.
“The best way to deal with uncertainty in my view is to keep the mind productive. Since there are external factors upon which we have limited control, the only thing we control is our own attitude to respond to such external factors. Therefore keeping the mind fully occupied on new initiatives or reworking a strategy on existing schemes becomes important. Having a fully blocked daily schedule including physical exercises and spending time with family apart from work are few practices that one can adopt,” he says.
Dealing with COVID
“COVID has fundamentally jolted humanity and the way we live. Much of it was taken for granted earlier,” he says. There is a growing appreciation of small aspects to living and perhaps the time is right to think through how one can adopt minimalism in their own lives.
“I continue to focus on delivering value to clients and also reaching out to prospective clients to offer them any guidance or mentoring support at this time, free of charge. It is also a good time to drive initiatives, provided there are resources to support the overall cost, for example, building a product has come down significantly so it gives liquidity for the service provider that engages in it. I am approaching it exactly this way. What I really miss are my regular outdoor runs but I am trying to compensate that with regular cardio workouts at home, sometimes with family and my son,” he says.
Hope to get innovative products and solutions
Karthikeyan welcomes the Action COVID19 Team (ACT) step by the investor community to provide this grant amount to companies to help solve problems related to COVID. Given that no equity is taken for these grants, the process of getting funding, from an administrative or compliance standpoint becomes much easier.
“We can hope to get innovative products and solutions coming into the mainstream for maneuvering the crisis with the funding received by companies, which possibly did not get this avenue opened up in the past. Some of the best minds are coming together for this initiative, which is something that is to be appreciated,” he says.
If it can Survive then Invest
Valuations have taken a significant beating due to a severe impact on the revenues as well as profits. It is anybody's guess as to when there will be a recovery in the top-line and earnings. Investors are cognizant of the same. However, Investors are exercising extreme levels of caution before making any fresh investments. Most of the recent announcements of funding are on account of the discussions that had commenced much before the crisis started. Some of the top Venture Capitalists are looking to infuse liquidity or fresh investments in their own portfolio companies where they see a revival after the crisis.
“On the other hand, where the situation is dire for the portfolio company, the investors are prepared for a write-off on their investments and are not willing to take any fresh bets. So, the approach of the investor totally depends on the positioning of the portfolio company and the likelihood of its revival and growth. There is an increasing focus on life sciences and investors would be looking to allocate a section of their assets managed for such sectors which were previously ignored due to the much longer realization of investments and the corresponding exit,” he says.
(Edited By Rabia Mistry)