Impact of the COVID-19 pandemic on financial management, corporate decision-making, and corporate performances
Student’s Name
Institutional Affiliation
Impact of the COVID-19 Pandemic on Financial Management, Corporate Decision-Making, and Corporate Performances
This report explains the impact of Coronavirus COVID-19 on businesses worldwide. The outburst of COVID-19 has led to a global health catastrophe that has had a huge effect on how people recognize the world and their daily lives. The COVID-19 pandemic, caused by SARS-COV2, has caused a unique public health alarm worldwide. Since the epidemic brought the world to a halt, it warrants investigation to gain familiarity with its impacts. The paper begins by defining financial management, corporate governance, and financial performance. It further discusses the traits of a pandemic and how it is anticipated to shape the economy, how the outbreak is projected to influence companies’ management in general, and how it is anticipated to shape companies’ specific risk-taking. Lastly, the report illustrates how the epidemic is likely to impact the firm’s financial performance.
During this COVID-19 period, financial professionals have faced a dilemma regarding actions to sustain their businesses in the crisis. In any organization, financial management is a crucial process for planning, controlling, monitoring, and organizing financial funds and assets to realize organizational goals (Karadag, 2015). Promptly addressing financial issues helps support businesses to respond effectively to different dynamics. The pandemic period is an important moment when financial professionals need to find a solution to the prevailing financial risks. Decision-making forms the most critical part of business operations, as it helps determine a company’s success level. Corporate decision-making is a joint effort among those strategically placed in ranks of power due to their areas of expertise or overall business intelligence (Karadag, 2015). Financial performance is a subjective measure of how a firm can effectively use assets to optimize revenues. Presently, financial performance has been incorporated as a strategy that promotes a firm’s competitive advantage (Karadag, 2015). In the COVID-19 situation, corporate decision-making must first concentrate on the human capital’s health and well-being, then financial issues to guarantee business flexibility and stability, risks to status, and interactions with stakeholders. The integration of financial management and corporate decision-making has an overall performance on the market and shareholders. COVID-19, besides causing a global health crisis, has culminated in a global economic crisis with major impacts experienced in firms’ financial performance, leading to the insolvency crisis or exit of firms from the market.
Characteristics of the Pandemic and How it is Expected to Affect the whole Economy
COVID-19 is a highly transmittable disease caused by a recently revealed coronavirus species. It is manifested by symptoms ranging from asymptomatic to severe illness and, eventually, death. The infected persons’ majorities encounter mild to average respiratory ailment and sometimes recuperate without medication (Adda, 2016). Aged people and those with underlying health conditions, such as diabetes and persistent respiratory complications, are more susceptible to developing severe ailments. The virus’s main and general signs include dry cough, fever, and tiredness with a slighter variety of generalized signs, such as pain, headache, and diarrhea (World Health Organization (WHO), 2020). The critical signs include chest pains, loss of movement or speech, loss of taste, and complicatedness and shortness of breath (Adda, 2016). COVID-19 spreads majorly by discharge and saliva droplets when an infected individual coughs or sneezes (World Health Organization (WHO), 2020). Social distancing is the main method to curb the pandemic’s spread as no cure has been found yet. However, scientists are searching for vaccines and, if possible, a cure.
The outburst of COVID-19 has impacted the economy worldwide. The devastation to the world economy due to the coronavirus has been swifter and more acute than the 2008 world financial catastrophe or even the Great recession. Every constituent of aggregate demand, such as consumption, capital spending, and exports, is in an unexpected free fall (Ozili, & Arun, 2020). The outbreak of COVID -19 has focused on the gaps within the global trusts, the drawbacks of global mutual and international funds. There are several channels through which the COVID-19 epidemic will impact trade and industry activity. From Figure1, the foremost channels include the service, manufacturing, education, and trade sector. The epidemic’s major economic effect originates from individuals’ actions to evade infection from the virus or the aversive behavior. In psychology, an aversive stimulus causes a change in behavior via negative reinforcement (Evans and Over, 2020).
Figure 1: channel for impacting COVID-19(Evans and Over, 2020)
According to Yuen, Gizem Korkmaz, and Zhou (2020), the aversive behaviors result from the government’s tendency to institute limitations on particular activities and reduce trade-related travel. Also, institutions and firms taking practical actions to evade infections adversely impact the economy. This substantially reduces the human resource supply, hindering a large sector of the economy from engaging in productive activity. The major sectors adversely affected include travel, retail, and entertainment (Ozili, & Arun, 2020). This situation will result in an output reduction that surpasses that of the great recession, translating into decreased income from the demand and supply sides. The COVID-19 pandemic has changed into a labor market and an economic shock, affecting both productions of goods and services and investment and consumption. Far from interruptions experienced in production in East Asia, the impact has spread to the global supply chains (Loayza &Pennings, 2020). This will have an overall impact on macroeconomic factors and economic performance.
The manufacturing sector has propelled the economic progress of developing countries. Manufacturing sustains national development objectives by lowering unemployment and increasing economic activities (Feyisa, 2020). The relationship between economic development and the manufacturing sector is significant regarding employment. Consequently, manufacturing is one of the key economic sectors that will be negatively impacted by the evolving humanitarian crisis. The other important field is the service sector, a driving force contributing immensely to many nations’ gross domestic product, employment, and commerce (Feyisa, 2020). To achieve Sustainable Development objectives, various service activities such as health, transport, and telecommunications play crucial societal roles. The service sector occupations dependent on customer-provider contacts are expected to take massive contractions due to the globe’s risk actions in response to COVID-19 (Feyisa, 2020). The tourism sector is more susceptible to the epidemic due to contacts between people. Presently, tourism is one of the major sectors impacted by COVID-19, impacting travel demands, and supplies. Finally, education contributes significantly to economic growth through various channels (Feyisa, 2020). The human capital development and efficiency in economies depend on the education level of workers. As the severity of the pandemic increases, the world population’s health prioritizes reaction measures such as school closures. Thus, covid-19 has led to a detrimental effect on the global economy and, importantly, macroeconomics.
Effects on General Financial Management of Companies
Citing this pandemic’s shocking effects, businesses and companies will require to start factoring COVID-19-Related Risks into Financial reports. In compliance with the generally accepted accounting principles (GAAP), businesses and companies from the United States could also be necessitated to factor COVID-19-related risks into their financial reports (Baker et al., 2020). Companies must consider the necessity to change income estimations used to appraise non-quoted financial mechanisms. Financial assets accounted at fair value on the balance sheet may result in realized and unrealized losses (Barone, 2020). Further, consumers severely plagued by the epidemic could be rendered incapable of reimbursing outstanding invoices. This economic situation may result in supplementary credit and liquidity risks, more than average bad debts, and write-offs (Danielli, 2020). Notably, the flow of cash from operations influenced by the pandemic has interrupted supply chains and productivity.
Companies with idle production volume may fail to allocate overhead costs to inventory as accustomed. Supplementary inventory due to travel bans may require evaluation for impairment and variations in prices due to reduced demand levels. The instability of the financial market has also impacted pension plans accounts (Danielli, 2020). Institutions and companies may require to re-examine both the expected return and funded status of the plans. For deferred Tax Assets, if approximations of revenues from foreign subsidiaries vary, companies may re-examine their tax policies to sustain and realize all deferred tax assets (Danielli, 2020). Firms located in areas incapacitated by COVID-19 may see their earnings decline, triggering impairment testing to facilitate evaluation for goodwill and other intangible assets. The re-examination of crucial accounting estimates and forecasts may result in an abrupt impairment. Furthermore, impairment testing may be done more than once this year if the situation is deemed to accumulate to more than one triggering event. According to Baker et al. (2020), uncertainty will center on the virus’s effect. The period of the impacts will continue as a business; economic policies and business are changing rapidly. Therefore, financial professions should help businesses formulate post Covid-19 financial decisions as situations revolutionize.
Companies would need to seek advice from more than one professional accountant for solid-decision making. The professional accountants will play a decisive and vital role in reducing financial distress to the wider public and businesses. Chartered accountants have set aside hubs with the most up to date opinions and recommendations. Guidance is updated in real-time on their websites on topics such as gaining access to supply chain problems and government grants. Generally, companies’ financial management impacted by the pandemic demands businesses, governments, and firms to keep up with the new information and adjustments. Moreover, practical implications will exist during the audit of financial reports. Some auditors and companies encounter practical difficulties in preparing accounts given the increasing restrictions on travel, meetings, and access to company sites by World Health Organization regulations. Consequently, the pandemic has influenced the GAAP standards in the process of administering financial reports preparations.
Effects on Specific Financial Risk-Taking of Companies
The coronavirus pandemic has significantly affected financial markets, subjecting financial risk managers to search for mechanisms to safeguard their companies’ economic value. Financial risk normally correlates to the likelihood of losing funds in an investment or venture. This may exist in many forms, such as operational risk, credit risk, liquidity risk, asset-backed risk, legal risk, and market risk. Investors, shareholders, and lenders can utilize various monetary risk ratios to evaluate a company’s projections in the midst of a pandemic. Under external uncertainty from COVID-19 financial systems are likely to weaken, accentuating the need for an effective risk management restructuring. The company’s corporate strategy is a crucial determinant of the interventions to manage operational risks, credit risk, market risk, and liquidity risks. The pandemic has decreased demand for services and consumption patterns, resulting in increased market volatility. Airline stocks are anticipated to deteriorate as investors project a sharp reduction in travels, with operational tasks tending to be high, impacting executives’ travel and crew safety. For instance, China’s southern Airlines stock market fell by 7% (Raga and Velde Feb (2020). The COVID-19 has also impacted the projection of bonds and the companies that rely on suppliers within affected countries. High volatility in the market has increased trading frequencies, resulting in increased costs and high market risks. As a result of increased volatility, companies face the risk of evasion of payments alongside differed loan repayments. This has an overall effect on liquidity risk management issues, mainly impacting a company’s liquidity. COVID-19 has its allocation of financial risk-taking effects on businesses and companies, demanding swifter decision-making for organizations to remain afloat. The risks are commonly critical for corporations in hospitality, entertainment, retail, and travel. The pandemic risk alongside supply chain interruptions has caused financial systems to re-examine the present risk management and operational risks.
As corporations and companies struggle to comprehend the present-day challenges and economic shocks of the virus, economic pressure resulting from infectious disease outbreaks is far different from operational influences. According to Fairlie, Couch, and Xu (2020), the coronavirus outbreak has posed a logistical challenge greater than the Great Recession that lasted from 2007 to 2009. It is worth noting that foreign investment and credit risk will substantially increase for those corporations and businesses located in nations that are stricken hard by the pandemic. Global stocks that have lost nearly 14% and $ 3.5 trillion are being erased from U.S listed stock, increasing market risks (Baker et al., 2020). This trading loss can be followed down in the channels of impact from the Asian markets to the European markets and further to African markets. The pandemic’s impact remains uncertain, and continued instability will be anticipated as market risks increases. The company’s operational processes are experiencing strain due to covid-19 regarding cutting costs while ensuring smooth operations. Importantly, companies have transited from office operations to home office management resulting in an increment in operational risks. The majority of corporations, companies, and businesses are reporting a decline in revenues besides a few like Amazon and manufacturers of personal protective equipment that have managed to accumulate massive profits. Due to the increment of market risks, consumers are expected to buy and sell goods and services based on fear of losing everything (FOLE) or fear of missing out (FOMO).
The Pandemic’s Effect on the Firm’s Financial Performance
Evaluation of a firm’s financial performance plays a crucial role in determining its long-term solvency and survival when its cash flows are deterred by external events such as pandemics. Investors, lenders, and shareholders adjust the firm’s performance evaluations based on annual reports’ market value. A firm’s financial flexibility indicated by sufficient cash holdings, reduced debts, and high profitability serves as a good indicator that it has sufficient resilience to endure during a period of economic shock. Firms associated with extra operational and financial flexibility experience less impact than those with less operational and financial flexibility. Worthy to note, a firm’s stock returns may fall less, in response to COVID-19 damage, due to its financial flexibility.
COVID-19 is evolving higher risk management than exterior risk, which may trigger managers to retain and increase cash holdings. According to Banerjee (2020), financial managers tend to suspend investments during uncertainty based on the real options theory to maintain liquidity and the need to maintain the repayment capacity of debts. Significantly, the preference for retaining more cash than investments reduces the businesses’ momentum to attain sustainable development plans and objectives. According to Shen et al. (2020), consumers’ demand for health and well-being remains crucial in contrast to social contact, resulting in a declined demand. This aspect contributes to a reduced firm’s revenue, decreasing liquidity, and eventually reducing its performance. The firm’s productivity and income decrease sharply due to restriction and isolation measures that reduce financial performance. Without government involvement, the drain on liquidity expected from operating on fixed costs with no revenues will advance to some firms’ insolvency, compelling them to exit the markets (Banerjee, 2020). Extension of pro-COVID-19 may prolong the effect of a businesses’ financial performance, disrupting the supply of inputs. The reduction in companies and business activities has brought dynamics regarding solvency, liquidity, and repayment capacity.
The ability to acquire resources at a lower cost also poses a challenge to firms’ financial performance. The restriction on travel has reduced access to global sources of capital and human resources. Global outsourcing of capital and human resources effectively reduces costs and secures global knowledge for firms. However, COVID-19 is a critical global health crisis that has necessitated countries to adopt seclusion measures due to its infectious nature. Mitigation policies to curb the spread have been stipulated and put into affection resulting in a negative influence on aggregate demand, majorly on consumption, and exports. According to Shen et al. (2020), certain congested areas such as supermarkets and shopping centers where people must visit were closed down. Further, most global countries instituted bans on imports to curb viral transmissions, which immensely affected businesses that trade abroad. However, financial obligations regarding employees, lenders, suppliers, and investors remain a priority that will drain the liquidity buffers leading to a reduction in a firm’s cash flow solvency. The liquidity may translate to a solvency crisis, resulting in tightening credit provision (Borio, 2020). On the one hand, individuals are also facing a sharp decline in income as unemployment increases. This affects the financial mechanism through an increase in non-performing loans, asset fire-sale, as well as unnecessary liquidation and insolvency filings. . Generally, the pandemic overall effect on a firm’s financial characteristics; cash flow, leverage, and returns asset, are likely to influence the shareholder’s and investors’ market and firm performance valuation.
Conclusion
Generally, most pandemics infect human beings, regardless of color, sex, age, and race. Therefore, COVID-19 portrays the necessity of cohesion and unity in people’s daily activities alongside adhering to the instituted protocols and measures. The abrupt outbreak of COVID-19 has severely impacted firms’ normal production and operational activities besides inducing a massive financial market crisis. In the coronavirus outbreak, it has become important to improve the health sector by investing more resources or health-related research. With a recovery in the global health system, the global economy will be revitalized. Noteworthy, the growth of a few nations’ cannot sustain safety measures for the globe besides offering them being section make effort pandemics.
The business world anticipates reducing the economic impacts of COVID-19 through sound contingency measures, business continuation, and risk management. This global challenge has necessitated companies and businesses to adjust their operations, thus incorporating e-commerce platforms, managing their human resource, promoting consumer needs, and adhering to governmental authorizations. COVID-19 being a global threat has triggered unprecedented challenges for firms and foreign markets. Exposure to foreign markets directly affects revenue production. Majorly, global economy drivers such as manufacturing, education, tourism, and the service sector have been adversely affected. Consequently, there is a reduction in employment, a decrease in the gross domestic product, and dynamics in consumer and investment spending. Potential economic outcomes are undefined owing to the transmission trends and mortality rate, and thus, forecasts of future cash flow of companies and businesses remain unpredictable. Therefore, it is important to consider global economic structure, financial risks, Corporate Decision-Making, Financial Performance, and firms’ characteristics when exploring COVID-19 impact.
Corporate decision-making in the midst of Covid-19 is not easy. It may require financial managers to engage a range of stakeholders for effective rebuilding and recovery phase decisions based on the current issues. The firm’s financial performance should be considered when the recovery phase’s decision and the rebuild phase are constituted. Therefore, the coronavirus (COVID-19), besides being a global health crisis, has created a global economic crisis with a major impact on firms’ financial performance, leading to an insolvency crisis.
References
Adda, J. (2016). Economic activity and the spread of viral diseases: Evidence from high-frequency data. The Quarterly Journal of Economics, 131(2), 891-941.
Baker, S. R., Bloom, N., Davis, S. J., & Terry, S. J. (2020). Covid-induced economic uncertainty (No. w26983). National Bureau of Economic Research.
Baker, S. R., Bloom, N., Davis, S. J., Kost, K., Sammon, M., & Viratyosin, T. (2020). The unprecedented stock market reaction to COVID-19. The Review of Asset Pricing Studies.
Banerjee, R., Illes, A., Kharroubi, E., & Garralda, J. M. S. (2020). Covid-19 and corporate sector liquidity (No. 10). Bank for International Settlements.
Barone, G. (2020). WHAT’S NEW IN FINANCIAL ACCOUNTING AND REPORTING IN 2020. Strategic Finance, 101(10), 10-11.
BEERBAUM, D. Accounting treatment of credit loss allowances amid COVID-19: Current Expected Credit Loss (CECL) versus IFRS 9 Expected Credit Loss (ECL).
Borio, C. (2020). The Covid-19 economic crisis: dangerously unique. Business Economics, 1-10.
Danielli, S., Patria, R., Donnelly, P., Ashrafian, H., & Darzi, A. (2020). Economic interventions to ameliorate the impact of COVID-19 on the economy and health: an international comparison. Journal of Public Health.
Evans, D., & Over, M. (2020). The economic impact of COVID-19 in low-and middle-income countries. Cent. Glob. Dev. https://www.cgdev.org/blog/economic-impact-covid-19-low-and-middle-income-countries
Fairlie, R. W., Couch, K., & Xu, H. (2020). The impacts of covid-19 on minority unemployment: First evidence from April 2020 cps microdata (No. w27246). National Bureau of Economic Research.
Feyisa, H. L. (2020). The World Economy at COVID-19 Quarantine: Contemporary Review. International Journal of Economics, Finance and Management Sciences, 8(2), 63.
Karadag, H. (2015). Financial management challenges in small and medium-sized enterprises: A strategic management approach. EMAJ: Emerging Markets Journal, 5(1), 26-40.
Loayza, N. V., & Pennings, S. (2020). Macroeconomic policy in the time of COVID-19: A primer for developing countries.
Ozili, P. K., & Arun, T. (2020). Spillover of COVID-19: Impact on the Global Economy. Available at SSRN 3562570.
Raga, S., & te Velde, D. W. (2020). Economic vulnerabilities to health pandemics: which countries are most vulnerable to the impact of coronavirus. Supporting Economic Transformation, 32.
Shen, H., Fu, M., Pan, H., Yu, Z., & Chen, Y. (2020). The impact of the COVID-19 pandemic on firm performance. Emerging Markets Finance and Trade, 56(10), 2213-2230.
World Health Organization. (, 2020). Coronavirus disease 2019 (COVID-19): situation report, 82
Yue, P., Gizem Korkmaz, A., & Zhou, H. (2020). Household financial decision making amidst the COVID-19 pandemic. Emerging Markets Finance and Trade, 56(10), 2363-2377.