How to Keep your Business Thriving while Social Distancing
The global pandemic caused by the SARS-CoV-2 Coronavirus, CoViD-19, has led to unprecedented responses as the virus spreads at rates faster than expected. The United States, like many other countries, has finally encouraged individuals, businesses, state and local governments too implement a social distancing strategy to reduce the rates of infection and contain the virus. At the moment, it may be discouraging that, as of 7 April 2020, there are over 330,000 confirmed cases but data from the last few days in the United States suggests that practicing social distancing is, indeed, slowing down the rate of infections. Among the latest examples of this policy working when implemented are New Zealand, who seem to have successfully limited the spread. However, this novel Coronavirus did not just bring the CoViD-19 pandemic as the only bugbear. Economies across the world are in turmoil; the US and its businesses are at risk.
Containing the Virus, but also Surviving the Impending Recession
The projections coming out of the United States are not promising at all. Some economists are estimating a total of 47 million jobs lost in the US could result in unemployment skyrocketing to 32.1% while the UN's International Labour Organization describes the CoViD-19 pandemic as the worst global crisis since the Second World War and estimates job losses equivalent to 195 million full-time workers (a reduction of about 6.7% of working hours). Further, several experts are in consensus that a recession is nearly inevitable because of the drop in demand and the potential halving of discretionary spending due to social distancing and the rising levels of unemployment. Undoubtedly, some major businesses will weather this storm but the majority of small businesses will be driven to the brink. Even without a recession or a global pandemic, small businesses struggle to survive. Just about half of businesses survive for at least 5 years. However, survival rates vary significantly across industries in which businesses operate.
Surprisingly, although there are significant job losses in the periods leading up to a recession, data published by the Small Business Administration in September 2019 suggests that there is no strong correlation between economic climate and the overall number of small businesses participating in the economy. Between 1997 and 2016, there were two recessions but the overall number of employer small businesses remained around the 5 million mark while there was a clear positive trend in non-employer firms. The great recession of 2008 was more profound than the recession at the turn of the millennium, as demonstrated by the nearly 2 million job losses. Despite over 200,000 (approx 4%) firms going out of business, the overall net loss in the number of firms was less than 50,000 (less than 1%). In the 2001 recession, there was no net loss in the number of firms at all. The number of firms exiting the economy in a given year (the exit rate) may increase significantly when approaching a global recession, most likely due to economic pressures and getting some basics wrong, but the majority of businesses survive.
In other words, when businesses fail, it is not primarily due to a recession. That is, the survival rate is influenced by factors other than economic booms or busts. This is further evidenced by an analysis of small business longevity spanning over two decades since 1995. The rate of small business failures with age seems constant and appears to be a function of time rather than global economic activity - survival paths have not changed much. To be clear, this current crisis is unprecedented and challenges are arising which have not been experienced before. Regardless, your business can survive. To thrive in this environment, the first step is to ensure that your business does not fall into the usual pitfalls which sink other businesses even in the periods of economic expansion.
Pitfalls in Business Exacerbated by Social Distancing
Despite the initial and unfounded optimism of President Trump, social distancing is very much in the foreseeable future of the United States. Experts estimate months, not weeks, of social distancing would be required to avoid millions of deaths. On the bright side though, this public health intervention may help economies recover from the devastation brought about by a pandemic or any other public health disaster. A recent study co-authored by a member of the board of governors of the Federal Reserve System, an economist from the Federal Reserve Bank of New York, and an assistant professor of finance from the Sloan School of Management at MIT studied the 1918 H1N1 flu pandemic (Spanish Flu) in the US. It revealed that lifting the restrictive measures in place too quickly is worse for the economy as non-pharmaceutical interventions lower mortality and mitigate adverse economic consequences.
Given that social distancing will not be ending anytime soon, businesses must accept it as the new temporary norm if they are to survive through this period. Not all industries will be equally affected, however. The hardest-hit sectors worldwide include the accommodation, food & beverage, manufacturing, retail and business services sectors. However, it is rarely ever the case that all sectors across the globe are significantly impacted this quickly by a single event. The interconnected nature of economies is such that the disruption in the affected high contact-intensive industries will be felt throughout the entire system.
There are several reasons why businesses fail. Among the leading causes of small business failure as reported by Forbes are a lack of market need (42%), cash flow issues (29%), competition (19%) and pricing pressures (18%), ineffective marketing (14%), failure to communicate with customers (14%) and poor business planning (17%). Not all of these factors are directly impacted by social distancing but the ones which are affected profoundly. The issues currently faced by small businesses could be aggregated as follows:
Short-Term Survival Strategies
There is not much that can be done by a business to address the reduction in demand as their customer base loses its sources of income. Reducing prices may be a short term source of cash but chances are this strategy is unsustainable, considering the most deeply impacted industries cited earlier also tend to be highly competitive and characterized by low margins. However, employing several of the strategies below could ensure that a business can remain operational during this crisis.
Staying Afloat: Small Business Interruption Loans
The Coronavirus Aid, Relief and Economic Security (CARES) Act is a $2.2 trillion economic relief plan which reserves $350 billion as forgivable loans for small businesses. The Small Business Administration (SBA) will oversee the loaning of up to $10 million to businesses which employ under 500 individuals for payroll, rent/mortgage, utilities and even debt repayment. The loans are entirely forgivable if a business can retain all of their staff or partially forgivable proportional to the staff retained.
The CARES Act is not the only pathway to solve short-run liquidity issues. There are nonprofit organizations, like Kiva, which provide small low or no-interest business loans to businesses in distress, and the SBA has set up an Economic Injury Disaster Assistance low-interest loan program for both business and homeowners. There are several other pathways which businesses could use to get funding or support including corporate grants and other local funds. It is vital to research these if your business is ill-equipped with regards to its cash reserves.
Widening your Market: Utilizing Digital Platforms
Businesses which have not embraced the digital age have been lagging behind their competitors. That gap will be exacerbated by social distancing. If a business had not established multiple touch-points with their base, now could be an opportunity to work on that. However, it is acknowledged that not all small businesses have the resources or budget to set up a robust digital presence. However, the most popular platforms are almost costless. Setting up Facebook and Instagram pages, for example, is free, as are some blog and video hosting sites. Combining this with a service which allows customers to access your products and services without leaving their homes could open up new markets. Trying to solve the problem of delivering goods and services to customers' homes could result in innovative and creative ways which would-be competitors could have used to disrupt the industry.
Opportunity for Strategic Change Borne from Crisis
The fact that this is happening at a time when commerce has been changing increasingly rapidly and at a time when the most successful businesses have been agile and adaptive creates an opportunity for business owners and leaders to review their strategies on how to create value for their customers. This would have been a slow and gradual process at any other time. However, this period is like an opportunity to reset.
Broadening your Scope
Many small businesses have limitations in terms of the staff they can hire and the skills they can train. Hiring and keeping talented staff is almost always about how long a business can hold on to them before bigger establishments come knocking. Sometimes, it is just about the lacking flexibility to pull staff from their regular work to train them in new skills which could add value to the business. There are multiple free or low-cost courses on the internet which could add value to customers and now would be a unique opportunity to add to those skills.
Rethinking Business Strategy
As discussed earlier, supply chains are undergoing significant change. Under normal business, perhaps a review of the existing supply chains would have been unnecessary. In the current situation, it is not possible to outright determine if a single business' supply chain will retain its competitive advantage, or even exist when this crisis blows over. As such, beyond keeping track of developments and trends in the relevant industries, it is worthwhile reanalyzing not just the business plan, but the overall growth and sustainability strategy.