Please find below the article of Mr Anders Liu-Lindberg, a recognized advisor to senior finance and controlling executives and an Interim Business Partner of Business PartneringInstitute.org.
The Coronavirus situation is critical, and companies are taking actions across the board. The real problem though is that we don’t know how long this will last. If it lasts for a month or two then the actions taken by companies might seem drastic – if it drags on, then they might seem timely.
Still, we cannot dispute the fact that even well-run companies are going bankrupt. I got a mail from a reader of my blog last week who explained that his company was staring at bankruptcy. Their whole business model was simply shut down overnight being a supplier in the hospitality industry. At best they would cut 70-80% of their staff and at worst they simply had to close the business. You can understand the frustration and despair this finance director was feeling.
In “normal” crises the downturn in activity happens in steps and you try to intervene with each step. This crisis has been somewhat different. It has also had its steps like companies banning business-critical travel or redeploying capacity from China to other markets.
Still, most companies would’ve felt the crisis hit from one day to the other. We all feel like Lehman Brothers in this crisis! That also means your plan A, B, and C felt useless and now you’re in survival mode for as long as you can stay standing.
I also spoke with a SaaS company though and they were still doing fine despite the crisis taking its toll on most everyone else. They’re selling consolidation software to companies and the need for having to consolidate your entities doesn’t disappear overnight. The customers keep paying and while sales and sales activities were certainly down, they were still announcing new customers in the middle of the crisis. Depending on what you sell SaaS or subscription businesses are likely to do better than most through this crisis because they’re not dependent on the physical element.
All spending is in scope to be cut and fast
Naturally, the crisis has companies cutting their spending to the core especially those with a business model being shut down completely like the example I gave. However, even you lay off people you might not get the benefit immediately. In many countries, you have 1 or even 3 months notice period. So how does laying off people help you in the short-term? The truth is that it doesn’t. It will only help if the crisis lasts longer or you were planning to do these cuts anyway.
All activities that are not business-critical are naturally in scope. That means most project work and investments (especially if they’re not committed) will be shut down or at best postponed for later.
All non-salary SG&A costs will also be in scope and while travel is a non-issue this time around then I see many temporary workers and consultants having their contracts terminated early. Employee benefits are likely also in scope, so the Summer party is gone, no more teambuilding and the bonus is almost certainly gone too (as the business results take care of that).
It’s cut or be cut at this stage and companies aren’t spending unless they’re legally obliged to or it is business-critical. Most everything else will be put in hibernation as companies try to survive the crisis and hopefully emerge in better shape than their competition.
Is laying off people the right course of action though?
Going back to layoffs to save the business it’s of course too early to tell what’s the right course of action. However, if we’re looking at a V-shaped recovery then laying off people will put you in a very poor situation. Because you won’t be able to re-hire fast again and you’ll lose momentum vs. competitors that chose a different path.
Re-hiring will be made even more troublesome as your employer brand has also taken damage. People will be cautious about applying for companies that laid-off people rather than sticking with them in thick and thin.
A much better way forward would be to temporarily cut salaries as you also see many companies doing. Alternatively, make use of government-sponsored plans to send people home with pay. In this case, you can simply pick up work again once the crisis is over. If the crisis doesn’t pass soon though the risk is of course that what you’ve done is too little and it’s too late to lay-off people.
Nothing should be sacred, but you’d be wise to consider twice if layoffs are really the right way to go! That is unless you’ll be able to digitalize work currently done by people. Many of your administrative processes like accounts payable and receivables are clear targets for automation. Many tools are available today already and the crisis will be a catalyst for companies to seriously consider this to create a mid- to long-term benefit.
What’s the role of finance and accounting?
Here’s the real question though for all finance and accounting professionals out there. How are you going to lead your company through this? When times are bad, management teams typically look to the CFO to save them and so shall the CFO.
However, it won’t happen without the use of good tools. Firstly, you must be sure to map all your spend categories in a value driver tree. This value driver tree goes beyond your P&L spending and into your balance sheet and your company risk profile.
Working capital, for instance, would be a good place to look.
- How likely is it for instance that companies will start cutting or freeze their subscriptions? Suddenly, what you thought was reoccurring bound by contract revenues are no longer there.
- How likely is that companies will start extending their payment terms so now it’s not 30 days but 60 days?
When plan A, B, and C are all bust companies will do whatever they can to survive!
Once you have a good overview of how value is created or destroyed in your company it’s time to pull out the big knife. Clear the table and start from scratch. A good tool to build up a minimum viable budget is to use Zero Based Budgeting. There’s no better time to truthfully answer the question “what do we really need to run our company”. My guess is that all departments in most companies are going through this exercise right now and you should be doing it too.
It’s very important though when doing these exercises that you have proper visibility into how your numbers are moving. If you can’t see the impact of your initiatives, you’re likely to fail in your efforts to save the company.
A good dashboard of all spend categories in real-time (or at least weekly) is a good first step. Here you’re likely not looking at accounting numbers but rather purchase orders, credit card activity etc. to find out if spending is coming down or not.
The last thing you can do, especially for more structured initiatives, is to create a value log where you track the impact of each initiative you take to get through the crisis. While your general spending dashboard will tell you if the overall direction is right or not the value log will tell you whether specific initiatives are successful or not. If you see one initiative failing, for instance, you might decide to act regardless of the overall numbers are good or not.
Lastly, a value log will also help you facilitate an after-action review once the crisis has passed. What worked and what didn’t and what can you do differently next time crisis strikes?
I know these are tough times for all of you out there but all you can do is stay positive, roll up your sleeves and get to work on getting your business through the crisis! What have you done so far to get your company through the crisis?