The Financial Impact of High-Risk Crises
It’s arguable if COVID-19 is truly a “black swan” event—something that was unpredictable with profound consequences on the global economy. The incident may better align with the coined term “gray rhino” – a threat on markets that was predictable yet ignored until too late. Whichever proposition, the need for a fix remains the same—detailed contingency plans must be put in place now to get you through this crisis, or to proactively ensure your organization will remain unscathed when faced with the next one.
As reports of the Coronavirus continue to erupt, many are questioning what the overall impact this global pandemic will have on the future. Entities across the world are doing the best they can to minimize the overall impact on health and safety. Additionally, the financial implications pertaining to this scare can be significant and farther-reaching than anticipated. Coupled with volatility in the market, and the only thing clear about the future is that it’s not clear. It’s at this moment we find it’s smart to get ahead of the issue by planning for various outcomes before they have a chance to become reality.
In the world of higher education, many institutions like Princeton, Harvard, Columbia, and the University of Washington are resorting to shutting down campuses and moving curriculums to online-only courses. Others such as New York University are limiting all nonessential travel overseas, while some are removing study abroad options for locations already affected by COVID-19. Others still, such as MIT, are canceling large public gatherings over 150 people to deter widespread contamination.
Meanwhile, school districts and local governments are facing a direct impact from news on the virus. Many schools are shutting down indefinitely to prevent the spread of the virus to children and parents, and self-quarantining procedures are being recommended for those suspected of being exposed to COVID-19.
In the case of utilities, transit systems, and other entities, such strains on operations can also lead to service cutbacks or delays in current strategic initiatives.
While we’re hopeful this scare will dissipate quickly, it’s important to prepare for the worst-case scenario: that it continues long term. The reality is that, while the decisions you make today may seem to solve the immediate problem, these choices may cost you down the line without knowing it. What is best for today may not be best for tomorrow.
Creating the right discipline around modeling your financial future now will help you mitigate such issues and may even uncover unknown impacts you would have otherwise missed.
How Could this Pandemic Impact You and Your Organization?
For colleges and universities, this means modeling decreases to study abroad programs, increases to online programs, changes to international student enrollments, and changes to housing residency. You may even want to model swings to overall enrollment and tuition, as students may opt not to return to campus, or campuses may shut down altogether.
For school districts and local governments, operational hits to the budget should be contemplated – if a state of emergency is declared, what could this mean to the bottom line? Would expenses increase? Would emergency personnel need to be brought in? What could the lack of travel do to tourism and the hotel industry in your area, and how will that affect taxes?
For utilities and other entities, could such massive hits on operations lead to service cutbacks? If people are choosing to travel less, could this actually lead to an uptick in service?
All of the above may be seemingly straightforward, but what about debt, capital, and investments? Will you need to make additional investments in technology as remote work becomes more important than ever? It’s also worth looking into potential recession scenarios and their impact on endowments and investments, especially considering the latest drops in the market. Could this lead to a shift in borrowing rates? Would construction costs need to be delayed? What will this all mean for credit ratings in the long run?
Modeling Through COVID-19 and Other Unplanned Mega-Catastrophes
Running analyses around potential scenarios is great, but without buy-in, it will be difficult to effect meaningful change in time for the analysis to be useful. However, if you’re able to stress-test your future and relay results back in a uniform language and format, you have a better chance to bring the necessary stakeholders to the table and empower them with the tools to make hard decisions now that will pay off in the long run. The impact of COVID-19 has and will continue to affect all domains and industries. Whatever your area of expertise is, we recommend getting ahead of the issue now by removing one crucial factor – preparedness for an uncertain financial future.
Author: Michael M. Nicolescu | Synario™