Covid-19 and Corporate Finance

Covid-19 and Corporate Finance

The covid-19 epidemic has negatively impacted the global economy and is threatening to cripple the operations of organizations. The current market conditions do not provide investors with an incentive to engage in risky investments and concerns because of uncertainty are making it challenging for businesses to generate regular earnings. Organizations are becoming conservative when making capital budgeting decisions, and investor confidence has significantly reduced because of the uncertainty surrounding  Covid-19 epidemic.

Current Market Conditions

Markets are functioning but have posted abysmal performance since Covid-19 became a global epidemic. Investors are concerned about the effect of the pandemic on the global economic conditions; thus, the sharp decline. FTSE share index Nikkei Share and the Dow Jones are some of the many stock markets that have experienced a sharp decline in recent months. Investors anticipate that financial institutions might reduce the interest rate, and traders are turning to less risky investments (Jones, Brown & Palumbo, 2020). The tremendous uncertainty and the new reality that a seismic shift is being experienced in the world have negatively affected investor confidence concerning the performance of the stocks.

Investors have panicked, and this has been reflected in the market conditions. The Wall Street losses have snowballed despite Federal Reserve efforts to inject more funds to stabilize United States financial systems amid fear that the pandemic’s stranglehold on the global economy will continue for a more extended period. European markets are experiencing some of the worst days in history with Pan-European Stoxx 600 recording an 11% decline and the stimulus package offered by the European Central Bank has not soothed the investors. Other regions, including the Middle East and Asia, have also been profoundly affected, and the global markets may continue recording worrying decline until there is hope that the pandemic will be adequately controlled within a reasonable period.

Impacts of the market on capital budgeting

Organizations understand that sound capital investment decisions and management of finance are crucial to ensure business long-term success and survival, especially when faced with epidemics such as Covid-19. The current crisis is forcing businesses to employ a conservative approach when engaging in capital budgeting decisions. The uncertain environment is making it challenging to effectively determine the risks and returns of a project and managers are opting to make minimal investments decisions or wait until the business environment improves. Determining whether a project is profitable requires the use of different methods, including the net present value and payback period utilizing the time element (D’Amato, 2019). The risks involved are high in the present and organizations are opting to continue with the available projects until the epidemic subsides or is over.

Impact on Working Capital Management

Proper management of working capital helps maintain a healthy liquidity position. The net working capital of organizations across the world is decreasing because they are unable to escape the present situation.  In times of crisis like the current Covid-19 epidemic, managing working capital becomes challenging because organizations may be in a dilemma concerning whether to embrace a conservative, aggressive or moderate approach. Organizations are trying to change their working capital management policies to accommodate the financial distress being faced. They have become more risk-averse knowing that any wrong approach may lead to losses, and an enabling environment does not exist to allow them to make adjustments in case of using a wrong strategy.

Many firms are trying to maintain liquidity by minimizing their cash conversion cycles and placing emphasis on cash preservation. There are also trying to minimize debt and inventory to ensure that funding sources are available. Like everyone else, businesses are unaware when the epidemic will end, and most organization strives to tighten the credit controls and emphasizes analyzing their trade partners creditworthiness. They realize that it may be too late to alter the working capital management policies after the crisis because past events show that organizations that have taken this route underperform. This indicates that winners will alter their working capital to reflect the current conditions in the market and survive the epidemic without absorbing significant losses.

Impact on capital structure

Covid-19 has led to the rise of risk and uncertainty in the business world. Organizations are expecting to experience a decline in returns and borrowers and lenders have also become reluctant to make long-term investments offering a source of capital for companies. Firms are preferring to finance their activities with internal funds to avoid asymmetric expenses. However, mixed results are experienced concerning the capital structures of organizations during epidemics. Small organizations are quickly losing their leverage, especially short-term debts.  Large public listed organization are given spare time by capital markets because of the internal reserves. Organizations size and financial conditions and lenders concerns about their performance are playing a role in determining whether they will access or need credit, thus, altering their capital structure.

Conclusion

Organizations strive to make financial decisions that will yield a positive return in a normal business environment. However, the current business environment is characterized by risks and uncertainties caused by the Covid-19 epidemic. Investors are concerned that they may lose their funds because the market is unstable. Organizations are also afraid that making risky decisions may be costly because of the inability to predict the future and possible outcomes.