“In preparing for battle I have always found that plans are useless, but planning is indispensable.”
― Dwight D. Eisenhower
Business owners everywhere are now engaging in a battle. While the enemy – the Covid-19 virus– is different than prior adversaries, the economic chaos it has generated (and continues to generate) has familiar qualities. In other words, in some respects, we have seen this enemy before.
That means we can use lessons learned from past downturns and recessions to improve the chances of surviving this one. The overarching message is to actively plan instead of passively waiting for things to happen to your business.
Based on our years of experience helping businesses to survive during times of adversity, we offer the following five guiding principles, or “battlefield directives” for your business to implement now.
It is absolutely critical to know how much cash you have on hand and how long that cash would last if you do not cut expenses. Get an update every day. Figure out when you are going to run out of cash so you know how much you may need to cut.
While everything is on the table – operating expenses, staffing, marketing, R&D, CAPEX – spend some time prioritizing. If cuts are needed, you want to do it based on a thoughtful plan, not a panic reaction. For example, cutting marketing may send a message to your customers and competitors that you’re already mortally wounded.
If you haven’t fully drawn on your line of credit, do it now. Large companies have already done so since the commercial paper market has seized up.
Make sure you understand your working capital needs. Are there historical trends in your receivables versus payables that would normally increase your working capital needs in the months ahead? For example, perhaps your business typically buys more raw materials in Q2 than in Q1 and your working capital has covered this under normal conditions.
These are not normal conditions, so you may need to adjust your purchasing plans.
Do what you can to collect your receivables. If your client’s clients don’t pay them, will they pay you? Stretch out your payables under the terms allowed, and initiate conversations with your vendors to renegotiate those terms if you have to
Be in touch with your customers. Pick up the phone and find out how things are going in their lives. Based on this intelligence, revise your sales forecast for the rest of the year, then assess how many salespeople you need. You’re probably overstaffed. You may want to redefine sales territories to give your best salespeople more prospects to cover.
Reconfirm demand for existing orders. Even though you have orders that haven’t been canceled, make sure someone will be there at the loading dock to receive the orders before you ship. In other words, don’t assume your customers are open for business.
Based on your new sales forecasts and confirmed customer orders, reassess your needs for raw materials and other purchases. Scale them back now, if appropriate (remember, Cash is King). Make a complete cash flow forecast for the next 13 weeks, and for the rest of the year.
Create a “most likely” version and a “worst-case” version, and figure out how much cost-cutting would be required to get through the worst-case scenario with positive cash flow. That may entail cutting back shifts or furloughing workers.
After you have created these informed forecasts, if there is a reasonable chance you are going to need a business loan to get you through the end of the year, have a proactive conversation with your bank. Don’t initiate that discussion without your forecasts and plans in place. Figure out your “ask” before you approach your lender.
See these steps in more detail in our article, Change Your Business Focus - Concentrate on Cash Flow.
With some team members working remotely, know that productivity under coronavirus restrictions may be better or worse than when WFH is under normal conditions. Staffers may be distracted if they have children at home who are normally at school – that’s temporary.
On the other hand, with shops, restaurants, theaters, etc. closed, there is little concern that remote workers will be skipping out to see a movie. That’s temporary, too. Still, if employees are engaged and productive when WFH, consider whether the arrangement could become permanent. If so, you might reduce office space and save on rent.
Obviously, in a manufacturing business, not everyone can be a remote worker. If you haven’t done so already, implement policies to limit contact on the shop floor, in the lunchroom, etc. Imposing “social distance” limits may spark creative solutions that improve productivity.
If your business is funded by venture capital, get a firm handle on your burn rate and try to reduce it. You need to adapt from a growth-focused mindset to a survival mindset. The silver lining is that you might be able to move up the timeline for achieving profitability.
M&A activity will decline. Buyers’ valuations will come down immediately, but sellers do not adjust their expectations as quickly. Moreover, buyers will not come back to the market until they have confidence in their own business as well as confidence in the business they may consider buying.
That means exits will be delayed for VC-backed firms, and VCs will have to hold onto their portfolio companies longer. It also means VCs will be less able and less willing to provide additional capital to marginal companies in their portfolios
Even when the economic outlook is bleak, there are opportunities. For individuals, it’s probably a great time to buy a car or refinance a mortgage. For businesses, it’s a time to show your expertise to your target market by offering advice or sharing info. That fosters loyalty and plants seeds for future business.
This could be a time to cut underperforming staffers that you had been keeping because the labor market has been so tight. Since there are likely to be layoffs in your industry, it could also be an opportunity to upgrade your workforce by hiring better, more experienced people than you have been able to find in recent years.
If you have been looking to acquire a business, valuations will come down from previously lofty levels, so some good companies will be available at attractive prices. It’s a good time to look around for businesses that can help yours grow when the economy picks up again.
Recessions are painful, but they can be like a forest fire that clears out overgrown brush and debris and prepares for new, stronger growth.
Taking the steps outlined above will increase the probability that your business is around to thrive in the aftermath.
G-Squared Partners has deep experience in profit improvement and turnaround strategies and we can help you to assess your situation today. Contact us for a free phone consultation.