By Monica Logani
In past recessions, the best companies not only survived tough economic times, but emerged stronger. Research by Bain & Company found that the top 10% of companies not only endured the Great Recession, but flourished in the following years as measured by key financial parameters and competitive outperformance.
What was their secret sauce and what can small businesses do today to prepare for a stronger tomorrow? The simple answer is to start on the defensive to manage through the downturn, and then move offensively to build a stronger company.
Start with non-essential spending
The first order of business is to defensively cut non-essential spending. This process of slashing expenses will be painful, but it will not only extend your company’s cash runway, but also make the company leaner and more profitable in good times.
The goal with expenses is to think about how to operate more efficiently rather than making indiscriminate cuts. There are many places to look for non-essential spending, and a quick look at the corporate credit card can offer many ideas: office supplies, subscriptions, travel, and personal perks, to name a few.
For bigger ticket expenses, don’t be shy about reaching out to suppliers to renegotiate contracts or extend payment terms. You may be surprised at the response as players from both the public and private sectors are offering assistance to small businesses affected by the pandemic. Remember, every dollar of expense that gets cut flows directly to the bottom line.
However, be careful to not go overboard and completely slash essential expenses. For example, in many companies, marketing budgets are often the first to get cut. Instead, take the time to figure out which marketing strategies are working, and keep spending on the highest performing customer acquisition strategies.
When looking at personnel costs, consider hour and/or wage reductions, furloughs, and performance pay before layoffs. If you have to let people go, eliminate underperforming employees first and make sure your cuts stay within the requirement of the “payment protection plan” (PPP) loan program if you are seeking those funds.
While it may be tempting to take on debt to navigate the crisis, try not to borrow for that quick cash infusion because a strong balance sheet will matter in the years ahead. However, if you have lines of credit available, you may want to draw them down if you are in dire need of cash. Be mindful of debt covenants and make sure you are not in breach of any.
Reach out to creditors to ask if terms can be adjusted. There is a good chance that creditors will be willing to work with you as they would prefer to negotiate terms over writing off debt. If you need a fast influx of cash, tap into small business financial relief programs including the Paycheck Protection Program (PPP), an Economic Injury Disaster Loan (EIDL), and the Main Street Lending Program.
When the obvious sources of cash are exhausted, take a hard look at your company’s assets to see if anything can be sold. Some examples include factoring accounting receivables or liquidating inventory. Although these assets will be sold at a discount, it may be necessary in a cash crunch.
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Measure your cash runway
Once you have a handle on how you will conserve/raise cash, it’s time to measure your cash runway. Start with your expected revenue. Be realistic and assume the current slow environment will last several quarters. Depending on your business, expect that existing contracts will be renegotiated, and new deals will be delayed.
Then model out expenses and working capital needs to calculate your cash flow and its impact on your cash position over time. Free cash runway models are readily available on the web to help small businesses get a handle on their cash position.
Once a liquidity crisis is avoided and you have a decent cash runway (ideally 18 to 24 months) to get through the worst of the crisis, start thinking offensively and run scenarios to prepare for the unexpected. This preparation is where the rubber meets the road and is a true differentiator between those companies that survive through an economic downturn and those that thrive afterward.
Take a second stab at revenue to analyze the impact of a prolonged recession. Although you may be expecting demand to return to normalcy later in the year, there is a likelihood that it won’t. With an unemployment rate north of 20%, it will undoubtedly take time for people to find jobs when the economy reopens, and for personal spending to rebound. So, it’s a good idea to run scenarios to anticipate a worst-case scenario and its impact on your cash runway.
Then create a contingency plan to prepare for all possible outcomes. This will likely entail a next layer of cost cuts and a potential cash infusion. Thinking through alternative scenarios and making contingency plans should become part of your strategic thinking, even after the downturn.
Take steps to emerge stronger
Next start thinking about how to emerge stronger in the long-term. Look for new opportunities to leverage your assets to satisfy COVID-19 type demand. It’s amazing to see companies quickly transform their manufacturing facilities in creative ways to reach new markets: an eyewear company that now makes safety glasses for healthcare workers or a clothing brand that now produces fashionable face masks for the public. The world will change after the pandemic, so stay closely connected to customer needs and think of ways to satisfy emerging new demands.
Use the downturn as an opportunity to adopt new technologies that can make your business more competitive from a cost, speed, efficiency, security, or customer intelligence perspective. Although it may not seem fiscally prudent to spend, it’s actually a smart time to arm your business with a technological competitive advantage, so when the economy turns, your company is ready to crush the competition.
Once you have weathered the storm, it is prudent to start thinking about creating a cash reserve for the next rainy day. A good rule of thumb is to have at least two months’ worth of expenses in a liquid account to navigate through a few slow months or another macro-economic disaster.
Surviving and thriving
Many businesses have the potential to survive through this economic downturn if they are committed to making defensive business decisions, thinking offensively to prepare for the unknown, and investing strategically to become more competitive. If your company follows this playbook it can emerge even stronger and thrive in a post-pandemic world.