“Some things never change” may be a financial cliché that has been redefined by nine months’ worth of COVID risks and money anxiety.
It is unanimous: 2020 was no ordinary year! Scrambling and dealing with the consequences of the pandemic was a major monkey wrench in the Canadian economy as well as the conventional basic of financial planning. Offices, factories, stores and restaurants were closed, staff were told to stay home – many without paychecks – and some unsure whether their jobs will still exist when the crunch is over.
Calgary consumers dealt with job loss and other unexpected broadsides and juggled savings. Alberta small businesses shuffled cash flow interruptions and operating costs. Investors dealt with plenty of volatility and turbulence, and many re-thought their future and their financial plans. Everyone was jarred by the realities of how fragile financial plans and financial security can be.
As financial planning Canadians review, assess, re-assess and maximize their 2021 TFSA and RRSP and GIC plans, the planning is trickier than ever. Some new aspects to consider include living longer and the unavoidable fact and wisdom that a longer lifespan requires additional planning. Mostly because emotional situations can lead to poor financial decisions, some facts of financial planning life – such as budgeting, credit, savings, debt management, mortgage deferrals and others – are vital.
And it’s been proven: money anxiety can and does impact grocery bills, housing, utilities and other necessities that still need to be looked after. Financial planning advisors caution that in response to the pandemic and the stress it has inflicted on people’s lives, many lenders have made changes and temporarily adjusted their lending policies. And some changes can impact credit ratings and do damage in the long run. They suggest keeping tabs on anything that impacts credit: like payment history, deferred payments, new credit accounts and amounts owed.
This year, more so than in others, the critical focus is on efficient but realistic financial planning for particularly small- and mid-size businesses, many of which have been abruptly impacted by dealing with the pandemic, lockdown interruptions in products and services, cash flow, strained operating funds and job losses.
Small business financial planning has become crucial, especially weathering the unique speedbumps of the past nine months. Annie Dormuth, Alberta provincial affairs director for the Canadian Federation of Independent Business (CFIB) points out that “the CFIB’s Small Business Recovery Dashboard shows only one in five of Alberta small businesses were making normal sales in the fourth quarter of last year. Bottom line is that on average, Alberta small businesses have taken on $119,500 in debt and simply don’t have the cash flow to really make their business profitable. Nearly half (45 per cent) of our province’s small businesses say they are losing money every day their business is open.
“This is really putting small businesses in a vulnerable position with just over half (54 per cent) worried about their sales, given the slow recovery trends and cumulated debt. For 16 per cent of Alberta small businesses, this has put them in a situation where they are actively considering bankruptcy or winding down their business.”
She adds that last March’s initial shutdown of the economy forced businesses to quickly adapt and change their business models. For some, it was an easier transition, such as restaurants moving purely to delivery or curbside pickups. However, many other businesses were not able to make this transition because their business purely relies on customers coming into the store.
To cope with the initial shutdown and prepare financial planning for second waves, the CFIB says 63 per cent of Alberta small businesses have undertaken risk management strategies as a result.
According to Wellington Holbrook, COO of Connect First Credit Union, the post-pandemic financial planning and operations management will be challenging. “COVID-19 has caused many business owners to be using their own personal savings to keep their business afloat. This poses a unique situations for Albertans in the sense that business owners have used up much of their resources and will be very sensitive to any further economic trauma that may be brought on by this pandemic.”
He notes that the financial flexibility which entrepreneurs and business owners have is much less than in over a decade. “There is just no question about it, when it comes to financial planning and risk management, small business is extremely vulnerable,” he warns.
Financial planning for 2021 and beyond has unique factors that business owners must consider. “First is the reminder that cash is king! We all want to believe the worst of COVID-19 is behind us, but the truth is that there’s still a lot of uncertainty. For efficient financial planning, business owners should consider developing mid-term strategy to ensure they have the ability to generate liquidity to weather any unexpected future turbulence. This means not taking cash availability for granted and using strategies that can help convert other assets into cash, just in case.
“The other factor is that cash doesn’t earn much these days and it won’t do much good – until and if it’s needed. Nobody knows exactly what 2021 will bring but we all know that those that have the ability to use cash to make needed investments at opportune times will likely come out on top.”
Most private and business financial planning experts suggest that the recovery, when it happens, will not be a wishful-thinkingly and simple on/off ‘light switch’ recovery. Dortmuth refers to recent CFIB numbers to underscore the reality that levels of uncertainty and changing public health orders have forced businesses to re-think their strategies and plan for the shorter-term rather than long-term goals and plans.
“About 41 per cent of Alberta small businesses plan to scale down operations with a plan to get back to normal,” she says. “Small business recovery at the current pace will take the hardest hit hospitality sector eight years to recover, with the average recovery of all industries expected to take close to 1.5 years.”
Holbrook notes that, generally speaking, economists are expecting interest rates to stay low for the next year or two, which should create a positive environment for business investment and markets in the short term. He says this low rate environment might mean it’s a not a bad time for business owners to borrow and invest in the business. “One thing that successful people know is that they will typically invest when others see fear, and they harvest when others see greed – the good times. Inevitably, recovery will come and when it does, those that have invested at a discount in the scary times will likely come out on top when the economy returns to some new kind of normal.
“The biggest challenge when it comes to effective financial planning strategy is our human nature,” he emphasizes. “We’re hardwired to sell when we’re scared and buy when we feel good. Instead, we should be doing the opposite. If you can buy when it’s down, you’re investing when no one else is and bargains are going to be found. When people are nervous about the longevity of their business, they don’t want to invest more.
“The future wealth creators in Alberta recognize that, despite our current fears (and there are sure lots of worthy fears out there), Alberta businesses will find a way forward, opting for bold steps of investing and taking risks now, when some others are too nervous to do it.”