4 Steps to Help Protect Your Business in Unprecedented Times.
The coronavirus pandemic has put immense pressure on businesses across just about every industry. With most everything in business and in life, there is some kind of precedent, but we’ve never seen anything quite like this before. No other incident in the modern era has been able to completely shut down business in nearly every industry for an indefinite period of time.
Many businesses have been left scrambling trying to figure out what to do, with only vague indications of a timeline and little information to help us predict what the “new normal” will be when people are allowed to venture back out into public.
But there is hope. People are stepping up to do their part. Businesses like distilleries shifted operations to make hand sanitizer instead of spirits. Others, like GM, are using their resources to address the shortage of face masks.
With that said, we want to do our part, too. We’ve been working behind the scenes to figure out what sort of resources we can create to help businesses during these difficult times. One important thing we knew we could do right away is provide some thought leadership in terms of crisis management.
Our Senior Partner, Mike Skillingstad, for example, led Best Brands to a dramatic turnaround at the height of the 2008 financial crisis as their CFO. A valuable experience to have as we head into this period of uncertainty. For this week’s blog, we asked him to tell us what his playbook would be as a CFO in dealing with COVID-19. We’ve consolidated his tips here into 4 actionable steps that we hope will be helpful for you as you’re preparing to work your way through this crisis.
STEP 1: Understand Your Cash Flow
This should be your first order of business, if you haven’t addressed it already.
“When you boil it down, you’re not going to go bankrupt from sales or margins, but if you can’t pay your bills, that’s when things go south,” says Skillingstad. “First order of business should be understanding where your cash is and what you can do to free it up. Assess the reliability of your AR. Understand your accounts payable. Then look at yourself – where do you have inventory and what can you stop buying or building for the time being?”
Let’s unpack that a little bit, starting with the accounts receivable. Understand that paying customers could drop you, stop paying you or go out of business completely if they run into a cash crunch, so do what you can to ensure your success isn’t contingent on theirs. It’s smart to pad yourself with more than a shoestring budget when things could change at any moment.
Assessing accounts payable dovetails nicely into our next step: making your first round of cuts.
STEP 2: Cut Anything You Don’t Need
Cuts are a multi-step process, which we’ll address further in Step 4. But as we further shore up our cash flow, the next step will be trimming the fat from accounts payable. So, where do we look first? We recommend taking a methodical approach here.
First, focus on SG&A. This is going to be the fastest and easiest way to cut. Look at what projects can be delayed and what bills can get canceled. Assess if you can change plans or providers to save on the things you need to keep. Most companies have a pretty good view of their SG&A, so ax anything you know is expendable off the bat. Then go deeper and ax some more.
Next you’re going to look at all discretionary spending. With COVID-19 locking everything down, at least you don’t have to worry about travel and entertainment, so there’s one that’s already off the books. Again, look to projects, improvements, etc. that you had planned and delay them for a time when things have stabilized. Anything that’s not necessary right now should be trimmed from the budget.
Then you want to look at third parties – partners, freelancers, vendors. Ask yourself, is this something we can do in house? Can we scale it back to a minimal cost or a point where it can be handled in house? It may not be comfortable, but you want to go as deep as you can with your cuts, without actually hurting the business. Maybe you’ll even find out the things you axed were things you didn’t need, after all.
“The biggest mistake companies are going to make right now is not cutting fast enough or deep enough,” Skillingstad explains. “Even if you’re in good shape, you have to cut now. The longer this goes, the harder it will be – and I think that’s the most important thing for people to understand. This is the right time to prune the tree.”
STEP 3: Understand What Is Profitable and What Isn’t
The next step is looking into your profitability. Every company knows their best-selling products and their biggest customers, but do you know which ones make you the most money?
This is a valuable opportunity to step back and ask some critical and oft-overlooked questions. Where do I make money? How do I make money? Where do I lose money? What can I do to maximize those gains and minimize those losses?
An example we use frequently is from one of our food manufacturing clients. They performed a customer and SKU rationalization exercise a couple of years ago and they were able to gain a significant boost in EBITDA by eliminating 25-30% of their SKUs and parting ways with some unprofitable customers. The client was working with a fixed amount of production line time, so they shifted their focus from standard metrics to profitability per hour of production line time.
Look at the fundamentals of your business and figure out how you can fine tune the model. Dive deep into the data. If you need help, by all means, contact us, we can get you there. Otherwise, do what you can with what you have. This is an opportunity to remake the fundamental pillars of your business so you not only survive, but come out even stronger than you were before. And this brings us right into our final step.
STEP 4: Mold Your Business for the Future
After you have a handle on profitability, you’ll want to pause for a moment and ask yourself one of the most important questions of this whole process: “What does the future look like for my business?”
The COVID-19 crisis will undoubtedly change the fundamental reality for many businesses. Could the “new normal” impact how you will be producing, packaging, delivering and selling in the future? How slowly will the economy ramp back up?
There are several other acute considerations that will affect businesses in very specific ways. Here are some possible questions to consider: Will there be a permanent effect on telecommuting? Will it change how people go out to eat and entertain themselves? Will some safety precautions become the new norm? These are just a few starters among hundreds of possibilities. Ask yourself, what is the potential range of new realities for your business?
Once you have an idea, ask yourself this: “In this range of scenarios, which items in the budget aren’t going to fit so well anymore? Where are the risks and where are the opportunities?”
Game plan everything out.
Now you can begin cutting and molding for the future. You can start shaping your business for what comes next by cutting away the things that don’t fit now.
If you have an idea what these potential future states look like, you can make well-informed choices when it comes to the hard decisions like eliminating products, services, divisions and performing headcount reductions.
“Everything has risk, and everything has to be evaluated along the way, but you have to operate under the assumption that what comes out of the back end of this crisis won’t look like what went in,” says Skillingstad. “You have to be strategically and surgically cutting to the point where you have the opportunity thrive going into what comes next. Determine the core things that really make your business successful, and really focus on those.”
What measures are you taking to protect your business in these uncertain times? What kind of data would help propel your decision-making process? We’d love to hear what you think. Sound off on social media now and join the conversation.