“Despite a complex environment, the best solutions are almost always straight forward. Identify key problems, create a simple course of action, follow-up on it regularly and adjust if needed.”
After several weeks into social and economic lockdown, it’s time to clear our heads and look into the near, medium and long-term future. In the short run your company’s survival may be under real threat due to a variety of reasons, such as your employees’ health conditions, cash constraints, supply chain restrictions or lockdown conditions preventing operations and distribution. In this article, I will pinpoint some of the key areas companies need to address to get through the crisis period as resilient as possible and thrive again after things get back to normal. Survival of the crisis and fast recovery after economy gets back to normal will depend on the measures taken in four key areas:
- Liquidity
- Customers
- Employees
- Planning and strategy.
I. Liquidity
Liquidity is probably the most decisive factor of surviving the period of distress. Even though the underlying reasons for the global financial crisis (GFC) are completely different, past experience can help us avoid mistakes that many companies made in those times. During the GFC I worked as a risk manager in a bank and was following the developments very closely. The GFC affected a large part of the economy due to an abrupt fall of demand and a sudden extremely tight liquidity. In general, companies were quite highly leveraged before the GFC, but not critically. However, that has changed after the demand plummeted, and losses and liquidity problems started to kick-in. Drop in profitability has directly impacted Debt-to-EBITDA ratio, which is the ratio that banks use as a measure of relative indebtedness. It skyrocketed even in companies that still managed to remain profitable. The perceived riskiness of companies increased and the banks were reluctant to refinance their loans and closed already approved credit lines.
Companies reacted by ”optimising” working capital, i.e. halted payments to suppliers, delayed purchases of materials and goods, some even stopped paying salaries to their employees. But mostly, they kept paying their financial obligations because they were worried about legal actions and executions that could have been initiated by the banks.
Cash shortage led to a death spiral. Companies found themselves in an impossible position to get back to normal even after the circumstances improved and orders returned. Due to a lack of liquidity, they were not able to service the orders and struggled to remain alive. Many, actually, went bankrupt merely because they could not fund their comeback.
Also in the current crisis liquidity is crucial and will remain so for quite some time after the end of the lockdown. Having good liquidity will be the only way to respond to the demand when it returns. Yet, after initial improvements in containing the disease, it might be expected that households and companies will start preparing for the second wave of the disease outbreak and possibly an even stricter and longer lockdown.
Liquidity management consists of several key steps that will be discussed below:
- Analyse and forecast cash flows
- Actively collect receivables
- Renegotiate with banks and lessors
- Perform cost analysis and reduce costs
- Halt investments and divest non-core assets.
I.1. Analyse and forecast cash flows
Analysis and cash flow projections are the first step to get an idea where your company is and what the possible outcomes are. It is necessary to assess probability of cash inflows and necessity of cash outflows. You need to prepare a few possible scenarios, however, all the decisions need to be based on the worst case scenario, which may eventually not even be the worst one.
Quite often a decreased demand and lower production at the beginning of the crisis actually improve liquidity. But this improvement is just temporary, and if all the cash is used up, the company will be in a much more difficult position to respond when demand increases. Projections need to be made for several periods and updated regularly as discussed below in the Planning and strategy section.
I.2. Actively collect receivables
This is one of the most important activities in the times of crisis. The objective is to get as much cash back as soon as possible. Liquidity situation will worsen for all companies, and your customers will start pressing to prolong payment terms. Just as you will want to delay cash outflows, so will they. You need to be in contact with your key customers daily. It has been observed many times that companies pay their liabilities first to the ones who “molest” them the most.
Stop sales where the collection is not 100% sure. Sales, if unpaid, can actually kill your company. It might seem that in the times of extremely low demand it is better to continue to sell products even if the timing of payment is uncertain, but this in fact is detrimental. It is much better to have inventories than uncollectible receivables on your balance sheet.
I.3. Renegotiate with banks and lessors
Renegotiate your repayments with banks and lessors if you are short of cash! Unless your creditworthiness changes dramatically, banks and lessors will be ready to extend your loan/lease payment or refinance it, after all, that is their business. In renegotiations, your analysis and cash flow
planning will come handy as you are going to be able to show that you are cognizant of your situation and can show that their investment is safe. If it won’t be possible to get to an agreement with them, you should still not let go of your liquidity. If necessary, it is better to start voluntary administration as the company can get restructured through an insolvency proceeding and continue to operate when the circumstances will change. Additionally, try to arrange as many credit
lines as possible. You will most probably need them all, if not sooner when the demand returns.
I.4. Perform cost analysis and reduce costs
Crisis is a good time to try to realise some quick wins in cost savings. Most companies have been quite fast in reducing payroll costs. However, cutting labour costs may be detrimental to your company in the long run, especially when it affects those key employees that contribute the most to your value creation, so proceed selectively. The next important category are suppliers’ prices. Renegotiate prices and terms. Focus primarily on those suppliers that have high margins on their products as they have more room to renegotiate the price. Your ability to pay them promptly will help a lot in these negotiations. Marketing costs are to a large extent discretionary even though it is quite difficult to reduce them in normal times. Now you have an opportunity to cut them with much
less resistance.
The question will arise whether to continue or halt your production if the demand drops. The answer is that it depends on many factors, one of them being the cost structure. If your costs are mainly variable, it is probably better to stop the production and not accumulate inventories. However, if the costs are mostly fixed, it makes more sense to continue with the production.
I.5. Halt investments and divest non-core assets
This is the most obvious and often the first reaction of companies, but it is still important to stress that for some investments it would be detrimental if put on hold. During crisis it might be difficult to divest any meaningful amount of non-core assets at reasonable prices. Thus, this should probably be only an emergency measure.
II. Customers
In crisis your customers aren’t trying to grow, they are looking to survive. They need income security and are mainly focused on solving their greatest emergencies. People generally purchase from people who they trust. The key to achieving trust is communication in which you
must make clear that you can help them in their current situation in terms of stability and quality of delivery, prices and terms of payment. Expressing support to customers is of utmost importance, but do not overpromise. As always, it is better to underpromise and overdeliver. It is helpful to segment your customers regarding their ability to survive the crisis and pay their purchases on time. Focus your activities and prioritise your deliveries to the ones you believe will stay healthy.
III. Employees
Your employees who work under pressure of social distancing, a threat of infection or of being stood down and work from home in isolation, may experience despair, which can be a destructive work attitude. That is why it is important that you help them see a way out. “We are here, we are working on solutions, you are not alone”, are messages that your employees need to be told. Top management needs to ensure them that they are solving problems and communicate the solutions regularly. Your employees understand that the situation is critical. Express gratitude to employees who work under these circumstances and advise what positive outcomes are expected from their extra efforts. In the era of transparency, being transparent is of utmost importance. If you are
transparent with your employees, they will trust your leadership. The crisis is actually an opportunity to improve your employees’ loyalty and engagement, which may well continue after the crisis. McKinsey’s analysis of value-based HR management shows that the top 25 to 50 people create the majority of a company’s value. Being involved in hiring, retention, performance management, and succession planning of these critical roles should be in a personal interest of a CEO. This is much
more true during the crisis.
Employees, especially key employees, should be kept motivated and ensured that their position is safe not to look for other opportunities. This is even more important for smaller companies that have less resources to attract and keep talent. On the other side, if your company is relatively large and stable, this might be a good time to attract talent that would in different times not be
interested to work for your company.
IV. Planning and strategy
A tactical action and a strategic plan should be focused on “2-s”: 2 weeks, 2 months, 2 quarters, 2 years. It is extremely important to be able to plan on a rolling basis for the next two weeks and two months. The most critical element of planning, as stressed earlier, should be liquidity. Short term plans need to be very detailed, elaborated to the level of the individual customer, supplier and/or product (depending on the industry and business model). The caveat is that your plans will
change constantly and considerably. Adjust your actions accordingly.
How will corona virus affect your business model? During the crisis, it is easy to be submerged in daily activities and tactics, however, strategic thinking is now more important than ever. The crisis might disrupt your business model permanently by fundamentally reshaping society’s beliefs and behaviours. Discuss possible medium to long term developments in your industry, economy and society. Don’t defend your current business model. There is high probability that the demand and spending patterns will dramatically change after the end of lockdown. The most evident change is that digitalisation has penetrated into all pores of our life, even into those in which in the past it was not imaginable. Exploit this change as an opportunity!
Business process optimisation
The times of lower business activity could also be used to optimise business processes and the supply chain. Companies rarely take time to rethink their processes and plan for improvements. Organise discussions at different levels and involve people from all organisational levels.
V. Conclusion
I shared with you some ideas and personal experiences to best survive the crisis times and bounce back when corona virus will be contained. Last but not least, it is very important to keep things simple. Don’t overcomplicate: despite a complex environment, the best solutions are
almost always straight forward. Identify key problems, create a simple course of action, follow-up on it regularly and adjust if needed. Keep an eye on what your competitors are doing, and how your customers are reacting to your measures.
And finally, the crisis is not about the events but our perception of them: let’s stay optimistic!