I’ve created 3 categories of businesses and explain what’s going on for each group and what they can do. The first includes those dealing with complete (or nearly) loss of business. The second includes those whose revenue has fallen more than 25%, and the third less than 25%.
Category 1: Complete Loss of Revenue Faced with no way to generate revenue the goal is survival, and my recommendation is hibernation in which they furlough all or nearly all employees and incur and spend virtually nothing. They will need to negotiate with the parties with whom they have commitments (banks, landlords, et al) to abate, defer and reduce expenses. I suggest taking the approach that these vendors and lenders are better off having the business re-open after the pandemic then to have them close for good.
These companies should also look to government programs to get them through the pandemic. These include PPP and EIDL loans as well as state and municipal programs.
Lastly, if they can find and make a pivot that will generate short term incremental profit to help pay bills and keep employees, they should act.
Category 2: Revenue losses greater than 25%. They need to focus on current sales, collections, expenses and cash flow while also looking for any indications that their revenues will start to decrease. They should take a cautious approach and assume that because everything is fine today it will be fine tomorrow.
Because cash is king and some business customers may continue to order products and services, companies need to make sure their customers are continuing to pay., If receivables or past due amounts are increasing, they need to be prepared for these customers to go out of business.
These companies should develop leading indicators to alert them to future reductions in revenue. Once a sign of negative future activity arises, management must respond and avoid the hopeful tendency to say it’s an anomaly and ignore it. Waiting too long to address reductions in a business could itself spell trouble for that company.
On a more positive note, they should look for ways to capitalize on the current economic environment including pivoting to new products and services and opportunities to acquire weaker competitors.
Category #3: Revenue loss less than 25%. If the companies are still generating positive Operating Income and Cash Flow, reducing expenses should be limited to fat which may not have been seen before the pandemic. Where possible, they should look for ways to improve operations and margins to come out of the recession as a “lean mean fighting machine.” They can also use their strong position to look for opportunities to acquire weaker competitors at bargain prices.
If you would like to discuss how CFO Options can help your business strategize and build financial models, please contact Larry at llevy@CFOoptionsinc.com.