Planning for a potential crisis tends to end up on the back burner until it’s too late. The crisis arrives, and your team is not prepared to deal with it, leaving you unsure how to navigate the multiple roadblocks standing between the current situation and the future health of the business. These risks can be compounded by the reality that the crisis may require you to make decisions quickly, often under duress, and in an uncertain environment.
Over the past month, COVID-19 has affected every facet of daily life, and nearly every business is dealing with the fallout. If you haven’t done so, taking steps to address this far-reaching crisis will help assure your business will emerge intact and primed for recovery when the crisis has passed.
The key to managing your business in a crisis is making good decisions and making good decisions requires information and communication. Here are some suggested steps to take in order to stay in control of your business during the current crisis:
- Assess the damage
- Take short-term action
- Go back to basics
- Look ahead
Assess the Damage
The first step is to assess the impact on your business and locate your potential problem areas. Look at the key drivers of your business. These Key Performance Indicators (KPIs) often begin with sales, but your analysis should dig a bit deeper and be specific to your particular business. Ask yourself questions, such as:
- Sales – Are you seeing fallout in your customer base? If so, how is it impacting sales? Has the timing of your accounts receivable collections been affected and/or has your customers’ credit quality been impacted?
- Vendors/Supply Chain – Are your key strategic partners healthy? Can you continue to source the materials you need to keep your doors open and continue shipping your products to customers?
- Employees – Can your employees continue to be productive and are modifications necessary to do so safely? In the current crisis, ask what percentage of your workforce, if any, can work remotely? Have some people become sick or are they dealing with family issues like lack of childcare or an ailing relative?
- Other – What other risks are unique to your business? For example, is your technology robust and secure? Do you have the capacity to support numerous remote employees? In terms of the COVID-19 crisis, are your key employees at risk of contracting the virus? If so, how will you address this possibility?
Take Short-term Action
Communication should be your first line of action. Open dialogue with key stakeholders immediately, including bankers, your board of directors, private equity sponsors and/or passive owners. It is okay not to have all the answers, but let them know that you are dealing with the crisis. Tell them what you know and what you don’t know. If the crisis will deliver a major blow to operations, warn your key stakeholders in advance and find out how frequently they would like to be updated on the situation and how involved they will be in the decision-making process. A crisis is not the time for surprises, and the saying “no news is good news” definitely does not apply in a crisis situation.
Let your stakeholders know you have a plan, but also that the plan could change. In a crisis, plans will be fluid and the course of action likely will change as facts emerge and your initial assumptions are challenged. Communications might include steps you are taking to mitigate problem areas and weaknesses, both those that are known and those that are anticipated. Your plan and subsequent updates should address both the immediate response strategy and be forward-looking. Where do we want to be 30 days or 90 days or six months from now? Where do we want to be a year from now? What will it take to get there?
Go Back to Basics
When a crisis hits, it’s time to take a close look at specifics. The first area to assess is cash flow. How has it been impacted? For example, has production stopped completely and prior orders cancelled or is your situation a reduction of demand? Perhaps customers are telling you that they are seeing a drop in their orders, foreshadowing a future slowdown in your sales. Have collections significantly slowed or fallen off completely? Are you continuing to burn through cash at a pre-crisis rate? If so, you may need to get strategic with your accounts receivable and accounts payable, while paying close attention to your sales activity and the necessity of various expenses.
In terms of accounts receivable, remember that making a sale doesn’t automatically put cash in your pocket. In a wide-reaching crisis, such as the current COVID-19 outbreak, there is risk that customers will not be able to pay their bills, and those that do, may not pay as quickly. How will you address this? Is there a strategic approach that will let you realize some portion of your receivables, such as offering or increasing existing early pay discounts?
In a similar vein, your accounts payable practices may need adjusting to hold onto as much cash as possible. Which bills are critical and which can be stretched? Get strategic. Vendors may be in pain and struggling to maximize their cash flow, too. If your own financial situation allows, offer cash in return for a discount. This works best in national or international disasters, like the current COVID-19 crisis, where everyone is in pain.
Another critical area is your banking and credit liquidity. Get in front of this quickly. If you are borrowing against your assets, typically accounts receivable and inventory, you will need to assess them both today and for the foreseeable future. How many receivables might age past 90 days and potentially become ineligible to borrow against? Along these lines, revisit your financial covenants. Are you in danger of defaulting due to noncompliance? If the answer is “yes” or “maybe,” communication is critical. Talk to your banker, and let them know the status of your business – both the good news and the bad. If your borrowing base is at risk or you are struggling to meet your financial covenants, it’s possible that the availability on your line of credit may be reduced or even withdrawn without further intervention. Timeliness may be critical here, as amending the terms of your credit agreement may not be a quick endeavor, and these conversations are always easier the sooner into the crisis they take place. Don’t wait until it is potentially too late!
Moving from your balance sheet to your income statement, analyze your revenues and expenses.
In the current crisis, assess what is selling and what is not. Ask yourself where is the current demand and how does that differ from your pre-crisis sales strategy? Can you change your product mix via your supply chain or production line to meet altered demand? If a strategic shift needs to occur, has this been adequately communicated to your sales team?
On the expense side of the equation, identify your fixed versus variable expenses. Keep in mind that it may be possible to negotiate cash flow modifications to what are traditionally considered fixed expenses, such as rent. Is it possible you can negotiate a payment plan with your landlord? When it comes to variable expenses, such as payroll, travel and marketing expenses like advertising and trade shows, you should evaluate the necessity of each. Are there costs that you can reduce completely or cut without sacrificing the long-term viability of your company?
Finally, review your capital expenditures. Don’t reflexively cut these. If you are making an investment in an essential item for your business, don’t mortgage your future for extra cash in your pocket today. If you recently made a capital investment in nonessential items, consider the cost of backing out. If you made a down payment or a partial payment on a capital item, what is your potential loss if you cancelled the order? Part of this evaluation should also include the initial strategic motivations for the capital expenditure in the first place. If an expansion or increase in capacity was based on anticipated increases in demand, has that changed in light of the current crisis? How much will the economy need to recover before demand for your product or services returns to normal or to projected growth levels?
Remind yourself that you will get through the current crisis, and don’t let the issues vying for your attention today crowd out the need to plan for tomorrow. Stay true to your relationships. If you are struggling, communicate with your stakeholders, customers, vendors and employees. Don’t risk your reputation for a temporary fix.
Use the information you have gained about your company’s cash flow, sales strategy and expense evaluations to improve operations going forward post-crisis. Look at what you had been doing before the crisis versus how you have adapted during the current situation. Can you loosen work-from-home policies, for example? Can you work with reduced office space? Is your staff size optimal? What about production capacity?
Ask yourself, when the crisis ends, will it take my company months to “switch gears” or are you ready to respond immediately? Can you look for opportunities in the market? While unfortunate, often times in the case of a widespread crisis (such as the current COVID-19 situation), not all businesses will survive. Struggling competitors may signal an acquisition opportunity or a chance to increase market share while the competition has decreased its presence. What have you learned during the crisis that will help you differentiate your company from the marketplace? Another area for business owners and stakeholders to look is wealth transfer and estate planning. If valuations are down, it might be an optimal time to transfer wealth.
Last but not least, take a moment to remember the pain of the past few months and put pen to paper to document a formal crisis management and disaster recovery plan. Consider what you learned in the current crisis and what you wish you had done differently or what actions you wish you had taken sooner. While we can never predict where/when/how the next crisis will strike, the lessons learned navigating the current crisis will prove invaluable if a new crisis were to occur.