As COVID-19 continues to spread across the country, businesses are closing down, workers see high numbers of layoffs, and there is great uncertainty for the future. So how can businesses survive? What strategies do we implement to ensure liquidity? How can they protect themselves against downside risks? Should they start producing and selling bidets? (Was that a terrible toilet paper joke attempt? Absolutely.) Here are some tips to help you stay afloat, through this economic downturn.
1. Building Cash Flow Projections
Making sound strategic decisions is nearly impossible to accomplish without knowing the timing of your cash inflows and outflows. Not only is it important to build accurate projections, but it is also crucial to build multiple projections outlining different potential scenarios. These projected simulations should reflect the changes to your income statement, as well as the impact on your balance sheet. A strong balance sheet will help determine creditworthiness of your company in acquiring or renegotiating bank loans as needed.
TIP: An overly optimistic projection can cause you to overextend and eliminate your company’s liquidity, while being too pessimistic might result in a more conservative outlook, followed by missed opportunities.
2. Maximizing Efficiency
With expected decreases in customer demand, issues revolving around liquidity will need to be addressed immediately. It is important to ensure all operations are functioning as efficiently as possible. Now is not the time to waste resources:
• Reassess what brings value to your consumer base, remove product lines and services with negative margins or uncertain futures, and divest business units that are unprofitable and draining resources.
• Review all expenses and eliminate all non-essential operating expenses. This can range anywhere from reducing travel (a no brainer) and office expenses to shipping costs and expensive car leases. This is the basic first step to take; you just need to spend enough to run business as usual – nothing more.
• Focus on inventory management in order to avoid any business interruptions, shortages and other supply chain difficulties. The strategy to implement here could vary depending on your industry and the product you are selling. A top option would be to switch to a demand system or drop shipping in order to cut costs and make your business leaner.
3. Cutting Cost Carefully
Speedy and well-thought-out cost-cutting are imperative, yet cutting too much, especially essential expenses for businesses, can hurt cashflow in the short and long-term.
• Marketing is one of those areas you should not skimp on as consumers are restless and constantly changing. Instead, be creative and use a cheaper method to reach your customers (e.g., social media). However, if marketing spend is entirely reduced, it can be more expensive in the long run, once the economy rebounds and you find yourself trying to catch up. While the economy is down, marketing efforts should be focused on bringing in short-term cashflow by re-evaluating product mixes and pricing strategies, as well as looking for opportunities to gain market share in vulnerable market spaces.
• Letting go of good employees could also be expensive in the long run, when the economy rebounds and competition and market price for these skilled workers rise. It is always more costly to hire from the outside, as opposed to retaining good staff as long as possible. Something to consider is to revise your incentive packages, if any, to ensure employees are aligned with new goals and strategies.
TIP: Make sure the impacts of your cost-cutting measures do not affect the long-term strategies of the business once the economy rebounds. It can result in an expensive recovery
4. Financing and Leveraging Government Assistance
With the COVID-19 crisis, the Government of Canada has introduced action plans to help businesses stay afloat. These measures include deferring income taxes owing, along with penalties and interest on late payments and wage subsidies for all eligible businesses. This is an excellent opportunity to take advantage of all deferral options and to renegotiate better loan agreements with your lenders.
You may wonder if it is appropriate for a company to increase debt during a crisis. Having accurate financial projections depicting what the business will look like in a worst-case scenario would help answer the question. If your business is in good health and already has minimal debt, then it is a great idea to take advantage of cheaper credit terms and lower interest rates to upgrade technology, purchase new machinery and any other business expansion plans.
A struggling business may have no choice but to ask for more working capital in order to stay afloat, as sales dwindle, and collections are slow. Businesses need extra working capital to pay ongoing fixed costs. But adding more debt when you cannot service current debt levels may be the last straw.
TIP: It is essential to collaborate with an experienced team member from your finance department, or a trusted consultant, should your team have limited accounting and finance knowledge, to build accurate projections. This is not only for your own strategic decisions: the banks will demand professionally prepared projections before handing out a new loan or renegotiating terms.
5. Renegotiating Contracts
Other than renegotiating loans, another cost-saving measure would be to reassess suppliers and current customers:
• Customers will be seeking more credit and longer payment terms. It would be wise to set up a rating for all customers based on the history of collections, risk and importance to business margins. Avoid extending credit to high risk and non-essential customers with minimal impact on margins. Customer loyalty is crucial at this time, and if you did not skimp on your marketing team, you could come up with some retention strategies, such as discounts for low-risk, high-margin customers.
• Reassess all supplier agreements and renegotiate better prices, lead times and payment terms if possible. Be careful not to fracture your relationship with suppliers, as they will be “hungry” as well during these difficult times. The less reliant you are on suppliers, the better positioned your business will be to make strategic decisions when renegotiating terms or switching to new suppliers
6. Taking Advantage of Opportunities
There is no better time to invest in the future than in a downturn when prices are low. This can be anything from purchasing discounted machinery and equipment or technology upgrades, as well as hiring quality employees before the market rebounds and competition is fierce. It may also be an excellent time to consider some mergers and acquisitions, depending on your company’s growth goals.
TIP: Conduct some competitive research and see if there are any vulnerabilities in their customer groups to take advantage of. Again, if you did not skimp on marketing costs and have a strong team, an aggressive approach can help you acquire some market share from a competitor that undertook a more passive approach to surviving the recession.
The various steps suggested above must be carefully thought-out, using a sounding board, or at least discussed with a trusted advisor. Make sure all scenarios are considered before implementing any changes. And most importantly, do not panic. Depending on how you look at things, behind every challenge, an opportunity can be found. Although the situation may not seem appropriate, strive not only try to survive but also to prepare for the post-crisis period.
