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The fallout from Covid-19: Lessons from China’s finance profession

Ji Zhou, assistant professor, SNAI, and Shan Yufei, knowledge manager, IMA, discuss a joint survey of Chinese businesses during the pandemic which suggests that there is a gap between the competences demonstrated by CFOs or finance executives, and the capabilities they are expected to have

The Covid-19 crisis has been an unusual challenge, impacting every major country and continent, but its timing – in terms of when it arrived and when it will peak – has varied immensely.

Enough time has elapsed since Covid-19 first struck in China for Europeans and Americans – and those in a similar trajectory – to begin looking for clues as to what the near future will look like. Business leaders – including CFOs and other leaders in the finance function – can benefit from a detailed analysis of how China’s companies were able to cope with the sudden challenges presented by Covid-19.

To this end, the Shanghai National Accounting Institute (SNAI), in conjunction with the US-based institute of Management Accountants (IMA), conducted a survey of Chinese finance and accounting professionals. The survey covered challenges related to business operations, financial and employee management, and corporate social responsibility, and used a sample of respondents from multiple regions of China and across industries.

The survey report, Chinese Enterprises Facing the Impact of The Covid-19 Crisis, revealed key findings that will have relevance for European and US businesses as they look toward economic reopening in the coming weeks and months:

  • The top three challenges for enterprises during the pandemic were poor cash flow, labour shortage and sharp drops in revenue;
  • The complete resumption of domestic production would depend on the resumption of upstream and downstream operations and production along the supply chain;
  • Small and micro-sized enterprises lacked crisis-response capacity and risk-management preparedness, which led to poor operational results;
  • More than half of respondents were cautiously optimistic about the complete resumption of business operations in China by the first half of 2020. More than 80% believed that the R&D investment and employee training expense as a percentage of sales would remain the same or slightly increase in 2020;
  • Enterprises perform their corporate social responsibility through donations and welfare activities;
  • Strong financial leadership is particularly important for the stability and sustainability of these enterprises.

Based on these findings, we were able to make recommendations for businesses in countries that have yet to reach China’s stage in this crisis, one where the health challenge has subsided, but economic challenges remain and stretch into the future.

Improve management of cash flow

Having three to six months’ worth of cash flow is the key to survival for companies during a crisis like Covid-19. Enterprises should allocate resources and optimise management through better assessing cash on hand, cutting down unnecessary expenses and expenditures, accelerating AR recovery, seeking funding through capital markets and applying for emergency loans and other endeavours. Meanwhile, enterprises should take precautions, and create a more comprehensive financial plan including near- and medium-term cash-flow arrangements and a reasonable debt-leverage ratio.

Protect and enhance access to credit

For any company, credit is an intangible but indispensable asset that has great bearing on long-term development. Financial professionals should evaluate contractual fulfilment ability by analysing aging of accounts receivables and payables to forecast supply chain risks. They should also actively communicate with stakeholders to reduce the credit risk potentially caused by emergency events.

Strengthen risk preparedness

Small and micro-sized enterprises’ lack of preparedness for Covid-19 reflected their dearth of risk prevention awareness and crisis management. These enterprises should incorporate major emergencies – such as pandemics – into their corporate risk management spectrums and establish emergency decision-making committees. Enterprises should also track the latest policies on bank financing and lending issued by central and local governments. During the pandemic, tax cuts and government subsidies proved highly beneficial for struggling enterprises, especially small and micro-sized ones.

Keep investing in R&D

More than half of respondents believed that it is necessary to continue to increase investment in R&D and employee training, as well as in digital technologies. Therefore, management should reevaluate their enterprise development strategies and business models, soliciting responses from every business unit to bolster productivity that improves business capital efficiency and restores growth in the aftermath of the pandemic.

Covid-19 has proven to be an enormous and unprecedented challenge for China and its economy. Given that China has gone through much of the pandemic already and is now addressing the fallout, the findings and recommendations in this survey would be beneficial to finance professionals in other parts of the world– and hopefully would enable them to get “ahead of the game” and ensure their companies’ survival during the pandemic and return to growth afterwards.

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