2020 so far; lessons learned

This calendar year is one we will never forget. Towards the back end of last year and the start of this year, the COVID-2019 virus firstly ravaged the wealthy and spirited Provence of Hubei, China. From there, this insidious and in so many ways, unknown virus imposed itself on the rest of the world, quickly inflaming into a full-scale pandemic.

With scientists and policy makers continuing to work feverishly; and with the private and public sector coming together like never before to find a vaccine; the continued wait time, or mourning time for many, can be used to digest the many lessons as highlighted by the pandemic so far.

These lessons apply to all individuals, families and businesses; all parties having been pushed to the absolute limit this year, still expected to battle on for many months, if not years to come. Battles have been fought regardless of location, industry sector and to an extent, SES level (perhaps more about this in later articles).

The challenges have been felt financially, physically and emotionally; and the crisis has exposed any chink in the armour of a household or business.

So, with all of this negative rhetoric so far, what are some constructive lessons to be learned?

From the perspective of both businesses and individual households, I would suggest that at least five ‘big lessons’ come to mind, summarised by:

1.     Digital awareness is no longer optional

2.     Cash is still king

3.     Balance sheet strength matters

4.     So too does income inelasticity

5.     Mental awareness is imperative

Digital awareness is no longer optional

For those who have been largely unaffected by the pandemic, with many actually thriving economically; I would contend that they have long ago embraced technology and have this embedded into their business systems or everyday personal lives.

Prior to the pandemic and the heavy restrictions being imposed on human movement, businesses and households who made use technology, such as software, hardware and who had adopted ‘digital awareness’, were merely more efficient and effective. This may have been something as simple as using a quality cloud-based storage service, or utilising free and easy instant messaging software.

Once the pandemic hit, these technological services; perhaps initially perceived by some as a gimmick or superfluous; overnight became a vital gateway to being able to order food; being able to speak with loved ones; or being able to maintain an income through employment or access Government support.

Lesson # 1 summarised: Don’t ignore technology. Become comfortable with it and treat it like a friend.

Cash is still king

While some may be grimacing with the use of this decades-old cliché, this and every other pandemic prior, have been highly correlated with a need to have cash on hand. Similarly, with respect to the old adage ‘having money aside for a rainy day’; this year has seen a deluge of those falling short in their cash reserves, noting that approximately 2.6 million Australians elected to access their superannuation early, a policy move which has created a lot of controversy, myself politically indifferent.

Secondly and for those who were dependant on Government support, these services went into near paralysis due to the unprecedented demand for these systems. The end result is that the delayed processing time, being many weeks in some cases, may not have ‘cut the mustard’ for those with children to feed, rent to pay or medication to purchase; not tomorrow, but today.

What about businesses?

Even for businesses entitled to the likes of the JobKeeper scheme, many employers reading this article still tremble at recollections of the four week wait between this Federal Government payment being paid into their trading accounts one month in arrears; during such time that their top line revenue had disappeared faster than Zorro.

Businesses that aren’t in need of JobKeeper support also know that access to liquidity is just as vital; including for those businesses who are paradoxically thriving during the crisis, requiring monies for capex or to increase capacity and throughput (think of ‘digitally aware’ online retailers).

Lesson # 2 summarised: Always have some cash in the bank as you never know what’s around the corner.

Balance sheet strength matters

Many readers will have already asked themselves about other options in terms of accessing cash, such as taking a loan from a bank or other forms of debt-financing.

Well, for many who have applied for loans this year, either to purchase a house, roll over credit card debt or to raise monies for a business; will attest to credit assessment levels as being eye-wateringly high, with credit assessors taking a near forensic approach; themselves required to uphold a prudent approach.

For individuals who already had high levels of debt, being able to obtain this finance was often impossible. Also note that any such credit declines are imprinted onto one’s credit report; further worsening their credit-worthiness. This is also why a good finance or mortgage broker will pre-assess prior to applying for credit, to prevent prejudicing future transactions.

What about businesses?

Many businesses went into the pandemic this year with already weak balance sheets, encumbered with fully exhausted overdraft facilities and oodles of other short-term debt being pushed to the brim.

If the business was in a rapid expansion phase, with the likes of a cash-hungry start with high operating leverage, everything may have been just rosy.

However, for businesses that were more susceptible to top line revenue being pulverised the way it has been (see next section on ‘income inelasticity’); these burdensome debt servicing obligations resulted in an inability in, or extremely high cost of obtaining further capital, likely having to go to sub-prime markets for capital. For many businesses, including the owners and employees therein, this has very, very sadly already seen their demise.  

This vicious interrelationship between a weak balance sheet and inability to access liquid monies, to keep a household or business running, acts as a poignant reminder of the perils of having high relative debts and then being ‘left standing when the music stops’.    

Also note that applying to a financier with a poor balance sheet is exacerbated during times of economic (or pandemic) unrest. Ask anyone who was working in corporate treasury during the GFC, with the capital markets and likewise short-term paper facilities going into paralysis; with institutions being spooked by the ‘unknown’ and thus unwilling to issue capital to their peers.

Lesson # 3 summarised: Clean up your household or business balance sheet when the going is good.

Income inelasticity also matters

Moving across to the other key ‘financial report’ for any household or business, that being the ‘profit and loss’ statement; this year like never before, has tested how much the broader market actually wants or needs your goods or services.

While there have been some tremendous success stories inside consumer discretionary sector, including within our own client base; how could I make this point any better than reminding us that the Federal Government actually told us what is and is not an ‘Essential’ service?

This varying demand for goods/services, or ‘elasticity’ thereof, is not a knew phenomenon. In fact, the likes of economists use models to quantify how elastic or inelastic demand may be for any goods or service. The less elastic, the better; as low elasticity essentially means more resilient is the demand, i.e. with demand then standing upright during the current pandemic amidst plummeting consumer sentiment (think Woolies, Coles, Aldi, etc).

My job as an adviser certainly isn’t to regurgitate economic theory; but to put in place strong risk mitigators for clients. This obviously starts off with assessing how robust the demand is for one’s goods or service, either for an individual or business; then putting in place measures to mitigate against this potential shortfall.  

Can a person increase their income inelasticity, i.e. ‘protection of’, by having multiple income sources? For example, this might be as simple as a café which also has an online food store; or a surgeon also maintaining a public job to mitigate against all of their earnings as being concentrated on elective works through private billings.

Don’t forget too, that all of these learnings are best implemented with a healthy cash reserve and while monitoring debt very carefully, aforementioned!

Lesson # 4 summarised: Increase and diversify your income certainty.

Mental awareness is imperative

With all of these theories and concepts flying around; not to mention the sheer amount of content available online these days, it’s easy to overlook one of the more subtle yet far, far more important things of all: you!

With regards to mental health, this year has highlighted two things:

1)    What makes us happy?

2)    How can we stay happy while we wait for the crisis to pass us by?

While I can only answer these questions for myself, I have no doubt that the restrictions in movement has meant that many have come to realise that the ability to see family and friends when and how they want; provides far, far more fulfillment than obtaining the latest Samsung S20 Ultra or iPhone 11 Pro Max (even though these do help in remaining digitally aware!).

N.B. Being digitally aware doesn’t mean you have to surround yourself with more technology than Bill Gates or Steve Jobs circa late 1970’s!

Secondly and to the second question above, ‘how can we stay happy’?

This question too obviously depends on each individual, however many have taken up new hobbies such as cooking, reading or listening to podcasts. Perhaps after reading this article, some will even make a few adjustments to start preparing for the next economic crisis, which is inevitable.

Either way, if you still haven’t found something to help keep your chin up, or have difficulty in achieving this due to any number of reasons, you can always reach out to myself (in privacy), your GP or call one of the free helplines such as Lifeline Australia, who provide 24-hour support.

Here is Lifeline’s phone number: 13 11 14

Lesson # 5 summarised: Monitor your mental health and use help around you.  

Final comments

This year has provided many lessons to us all; and will remain so.

This article summarises five of these; all being interlinked in some way, such as households and businesses without financial pressure as having at least one less stress to contend with.

Whether this is observed or even possible is something yet again, which is why the fifth point on mental awareness is the most important of them all.  

Written by Brett Jackson (M.App.Fin., B.Com., DFP)          

Director, Lantana Private Wealth

Brett has lectured at the post-graduate level, tenured as a Scholarly Teaching Fellow at Monash University.  

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