Preparing for the Financial Impact from Coronavirus
Symptoms from the new coronavirus outbreak continue to spread, and the repercussions from the virus are affecting more than just employee health and well-being. The U.S. stock market plunged in late February as it became clear that the risks related to the COVID-19 virus would not be contained to international visitors to Wuhan, China.
With the volatility in the markets and the continued spread of the COVID-19 (standing for the coronavirus disease 2019) virus cases domestically, it is only a matter of time before U.S. businesses feel the financial ramifications of the new coronavirus. How much of an impact companies face depends on their sector, their geographic footprint, and their business continuity plan.
Industries with the Most Impact
Certain types of companies will experience more of an impact from the COVID-19 virus compared to others. The sectors most affected in the near-term include the following.
Travel, Tourism, Hospitality and Entertainment
Several airline carriers acted quickly to suspend international flights to China as news of the outbreak broke. More recently, flights to South Korea, Japan, and Italy have also been affected. Domestic travel has dropped off as well. Taken in whole, the Global Business Travel Association estimated the COVID-19 virus could cost the global travel sector $46.6 billion per month, and a decrease in demand near September 2001 levels.
Businesses that rely on public gatherings for revenue streams such as restaurants, sporting arenas, and theaters may experience a temporary decline in attendance and support as well. High-risk residents in Washington State, for example, have been instructed to limit public exposure until the virus has been contained locally. Several high profile conferences and conventions scheduled for March have been cancelled, including Austin's South by Southwest festival.
Asia is a significant market for major U.S. retailers, including Nike, Starbucks, and Apple. Many companies have opted to close several locations in Asia until further notice, and suspend employee travel between locations.
Technology, Life Sciences, and Manufacturing
Similarly, if you or any of your key vendors sources a significant portion of its products from China, South Korea, and Southeast Asia, prepare for disruptions to your supply chain. Many companies in the computer hardware, electrical component, appliance, and pharmaceutical industries may have Asia operations. Workers in their facilities may be under quarantine or shipping from those areas may be limited by travel restrictions.
Industries with Moderate Impact
Other sectors may experience moderate financial repercussions from the COVID-19 virus. Oil and gas prices will likely decrease due to the slowdown in international travel and consumer demand. The Federal Reserve has already delivered an emergency half-percentage rate cut and may choose to cut rates to boost consumer spending, which could affect the financial services sector. Market volatility and collection risks for receivables and loans may increase, potentially resulting in short-term losses or impairments of assets for many companies. Commercial real estate could see a drop off in demand from Chinese and Japanese investors, who have increased purchases and investments in U.S. commercial properties over the past few years, particularly in coastal markets.
Similarly, agriculture may take a hit, as many U.S. farming operations export soybeans, nuts, and other crops to Southeast Asia.
Financial Markets Impact
Initially the U.S. financial markets had shrugged off the risks associated with the COVID-19 virus, but of late, the markets changed course when the COVID-19 virus cases appeared in Europe and the Middle East. New cases in new locations, including Italy and the state of Washington may cause continued market fluctuations in the short term as local, state, national, and international governments and health officials scramble to contain further spread of this coronavirus.
Companies that have investments tied to international commodities markets or foreign currencies (such as hedging arrangements) should be prepared to feel some fall-out from the market volatility. Public companies may consider disclosing the impact of the financial markets’ reaction to the COVID-19 virus as part of their periodic filings.
More companies may be leaning on their remote work policies as the spread of the COVID-19 virus continues. If the work-from-home affects financial reporting functions, public companies should be prepared to disclose that impact in their internal control over financial reporting information. The Securities and Exchange Commission (SEC) considers policies that affect business response plans to be material. Risk disclosures made in SEC filings may also need to be updated to address direct risks to a company from the COVID-19 virus. In addition, companies may consider addressing or updating indirect risks caused by market volatility, interest rate risks, and changes to the general economic outlook.
If you operate a business where not all of your employees have the option to work remotely — such as hospitality and entertainment, and healthcare — your management team should be prepared for that impact on your workforce. Coordinate with your human resources and payroll departments to prepare a plan on how the company would respond to a situation where workers are prevented from doing their job due to public health concerns. These provisions may or may not already be part of your organization’s overall business continuity plan.
Companies and their finance teams should also be prepared for questions about how quarantines and other public health guidance will affect benefits such as payroll and health insurance.
Investors, companies going through major transactions, and others who need business valuation services should be mindful of the effect the market and demand fluctuations will have on valuation analyses in the short-term. Valuation practitioners will need to incorporate long-term profitability and outlook into their analyses to ensure the business valuation is not unduly weighted toward the current state of the market. With all hope, the fluctuations we are experiencing will be relatively short-lived.
With the human cost that accompanies the COVID-19 virus, conversations around its financial impact can be difficult. No doubt, the new coronavirus is a tragedy that has affected the lives of thousands of people across the globe. Businesses need to be sensitive to the human impact, but financial leaders in particular need to do what they can to prepare their organization to navigate the COVID-19 virus’ repercussions for their organization’s bottom line.
If you have any questions, please contact your CBIZ Valuation Group, LLC professional or a member of our team.