The impact of the post coronavirus recession looks set to exceed the financial crisis and to bring the term “great depression” into the 21st century. From local start-ups to global multinationals many businesses will experience reduced sales. While some sectors are likely to be hit harder than others, (consider, for example, hospitality compared to financial services), many businesses will have to choose between reorganisation or no organisation.
If your business is experiencing steep top line decline look for ways to stem the cash haemorrhage. Emergency measures might include renegotiating the terms of fixed outgoings such as existing loans and rent. Government support should be considered before more drastic action in terms of staff costs. Look to improve working capital by collecting receivables as soon as they are due and consider renegotiating creditor payment terms. Put together a three-month rolling cash flow forecast. The benefit from government grants and earnings support schemes is temporary and if your sales do take a sustained dive you’ll be better placed to apply for a loan if you can demonstrate accurate cash flow forecasting at a managed burn rate.
Shifting to the P&L, perform a review of your discretionary expenditure such as marketing, training, travel, consultants, freelancers and any other temporary staff costs. Re-evaluate the viability of capital expenditure projects and consider putting projects on hold. Write-off of sunk costs may be necessary if incurred on a project no longer viable in a post covid19 world dictated by lower medium to long term sales prospects.
These short-term measures are aimed at putting the fire out. Now you need to build a sustainable business model for the future.
You’ll start with the assumptions behind a realistic sales forecast. These include price, product mix and volume and will be determined by recent trends using excel formulas that can be updated in an instant as assumptions become more accurate reflecting either actual data or when estimating best, worst and most likely scenarios. Cost of sales and gross margin will be estimated using similarly variable cost, mix and volume assumptions and scenarios.
Next focus on administration expenses and apply a zero-based budget approach by which justification for every cost item is needed. Staff salaries should be modelled by employee by month including planned joiners, leavers and pay rises. Again, the use of formulas to instantly vary assumptions will allow analysis of a range of scenarios. The use of ratios to monitor the evolution of costs (both staff and none staff) versus sales and gross margin is a recommended discipline and provides useful key performance indicators (KPI’s). If you need to sacrifice staff for the sake of sustainability, cut deep and swift to stay ahead of the curve and to avoid continued repetition of a painful process.
As the months go by and you gain more confidence in your model’s accuracy, keep studying the market and identify performance trends. Green shoots will allow a cautious approach to investing in a targeted, cost effective marketing plan defining dates, actions, media type etc. As more shoots sprout it’ll be time to reassess and unlock capex projects and pencil in new hires to your forecasted salary line. Keep monitoring KPI’s and reassessing strategy. Best practise is not exclusive to recession.
If your business is without a full-time finance director, then perhaps a downturn isn’t the most obvious time to hire one. A part time FD can provide a cost-effective solution adding strategic value by focusing on agreed business needs, analyse real time financial data and trends and use them to build forecasts and models that can be instantly flexed as assumptions become increasingly accurate building your confidence as you forecast for recovery.
PwT Consulting provides part time and interim FD services to Island businesses
+44 7624 339 200