Ask a CFO for their advice during an economic downturn and they will most likely respond by saying,
I spoke with two of our most experienced CFOs, Nicole Wallace, CPA in our Indianapolis office, and Jeff Whipple based in Northern California, to talk about costs of reopening for SMEs and how to manage them.
As you probably guessed, there is no one-size-fits-all answer to managing the costs of reopening during a pandemic.
Instead, there are lessons learned that only come from pushing out that wall as a start-up or making it through the 2008 recession and beyond.
Fortunately, our CFOs have seen it all and have great advice on how to manage the cost of reopening your business.
The Runway is Paved with Cash Flow
The primary goal of reopening—your office, your auto dealership, your gym, or factory—is to do so safely and cost-effectively. To abide by local and state orders on social distancing for your space and to encourage employees and customers back to your place of business, you will have to make many changes to your workplace. Those changes increase your cost of doing business.
Ask a CFO, can we reopen, provide PPE for our workers, ensure proper social distancing, and cleaning of our facility? You will get a question for your question:
“What’s your cash flow look like?”
There is no better time to know how long before all your available funds are all spent.
The rate at which you spend all available cash is your burn rate.
The amount of time or money that your company can operate without generating revenue is your runway.
A company’s runway is paved with cash flow.
Your cash flow statement will be your best friend in an unpredictable market like we are experiencing in the coronavirus pandemic. Make sure that you are reviewing this monthly, if not weekly, and have your finger on the pulse of your inflows and outflows of cash.
Your ability to extend your burn rate (cash net) and operate in the red will be determined by how well you can manage costs, especially since revenues will continue to fluctuate for the near future.
Every time you review your cash flow statement, ask yourself the following question: How do we push the cash wall out and find one or two more months of runway?
To answer that and find the cost savings to extend your runway, you make a road map of your cash flow. Ask us how.
People Costs to Reopening a Business
Typically, when finance starts looking for ways to improve cash flow, cuts to personnel—eliminating contract workers, consolidating roles, freezing new hiring, furloughing employees, and layoffs—are the first measures to be considered.
Personnel Cuts are Complex
Reducing and cutting personnel is complex.
There are costs to morale, productivity, and costs to competitiveness that come with layoffs that need to be weighed against the immediate cost reduction in salaries and overhead. The Paycheck Protection Program incentivized companies to look elsewhere to cut costs which saved jobs and kept attrition down.
Empowering and motivating employees and customers who are still unwilling to risk exposure to COVID-19 is also complex.
The cost of a positive test in the office would dramatically slow productivity for the 14-day quarantine for all exposed. Health care bills fo COVID-19 patients will drive up employer insurance costs. How much is yet to be seen.
The cost to reopen your workspace and then to meet requirements for regular cleaning and sterilizing of restrooms, the breakroom, and the waiting area at $2,000 to $5,000 a month for professional janitorial services or time lost to employee productivity are both important cost factors to weigh when reopening. Now, multiply that by hundreds of square feet and imagine the cost of coronavirus cleanings to an automaker or packaging plant.
Managing director and CFO Nicole Wallace noted that there is also a cost to not being able to look someone in the eye or to meet as a team around a conference table.
Knowing how long before your company hits its cash wall will put these complex post-coronavirus costs into perspective.
Remote Workforce Costs to Consider
Business is based on relationships that are increasingly being developed through technology. Can you do business with a remote workforce?
Managing a remote workforce is happening and, for many sectors, it’s working.
It is critical to not lose visibility of your workforce and this gets exponentially more costly for multi-site employers on a regional or national level. Managers of a remote workforce need to pay attention to morale and communicate regularly to each employee of their role’s purpose and value to the company.
Nicole advises companies to define remote workforce success in a measurable way for every resource you have.
No cost is off-limits from being cut-off or reduced. Are you getting the most out of your ERP? Are all teams using subscription, cloud-based software effectively to communicate on projects?
Ask employees for feedback on what they need to do their jobs better at home and in the office. Form a representative Reopen Safely Team to advise the CFO on financial priorities for the entire workforce and assist with the education and communication of all COVID-19 safety measures. When your employees feel safe, your customers will feel it too.
When you are making decisions about what is needed to empower your workforce to do their job effectively and safely, it is important to identify and quantify all costs to bring people, your employees, and your customers, back to your storefront, your office building, or your showroom.
Physical and Material Costs to Reopening
Ask a CFO what are my physical and material costs to reopen? They will most likely reply, What is your business? Reopening costs for businesses in a physical and material sense vary widely depending on your type of business.
Look no further than your cash flow statement for areas that will need to be closely managed for cost-effectiveness as your business reopens.
SaaS and other subscription businesses need to take a look at third-party costs, the cost of customer success (retention), internal engineering operations costs, and other professional services costs of doing business.
Manufacturing will be aware of labor variances (furloughs for seasonal work) as well as scrap/yield costs, excess/obsolete inventory costs, and overhead variances. Manufacturing calculates the costs of goods at standard (direct labor, direct material, and overhead costs) to prepare for predictable sales cycles. We all held our breath at the beginning of the coronavirus pandemic when reports brought to light the dangerously low supply of ventilators, hand sanitizer, gloves, masks, and other PPE.
Any business reopening to the public will have new costs of doing business responsibly and safely and according to social distancing. The costs range from stocking up on PPE and cleaning supplies, equipment, and alterations to workspaces designed for open, collaborative work, paying for software, VPNs, lunch stipends, to ergonomic office furniture for the home office. Pay attention to the cost of maintaining underutilized capital expenditures such as real estate and equipment.
Downside to Cutting Costs
We have all been waiting for businesses to reopen to the public, and now that they have customer preferences have changed. They want masks and gloves from their baristas but not their maître d’. They will shop online before they will come in for full service.
Your competitors will have changed too. The National Restaurant Association reported a $94 billion shortfall in projected income for restaurants and bars between March and May, drastically changing the competitive landscape in the food and beverage industry.
Is there a downside to cost-cutting? Yes. It could be your competitiveness.
Nicole cautioned against reducing sales too far or deep cuts to marketing and customer service because of the loss of valuable industry indicators that can lead to innovation. What are your customers looking for from your brand today? Tomorrow?
Deep cuts to marketing and you may risk missing opportunities to innovate and release new products when the market is hungriest for something new.
Look for ways to pivot as some distilleries have done by using alcohol stores for hand sanitizer to boost revenue (increase burn rate) and brand recognition. (Incidentally, alcohol used in the production of hand sanitizer also gets a break from the excise tax.)
Keep your eye on when everyone is truly up and running again to avoid cost-cutting your company out of its competitive edge.
7 Markers of a Runway Cleared for the Future
Let’s assume that you have a runway of cash. You have a road map of cash flow. If you have sought the expertise and insight of an experienced outsourced CFO, we can assume that you have actionable steps to take that will keep your business as competitive as possible. Implementation of COVID-19 safety measures and guidelines are complete; expectations of managers and employees have been communicated, and you have told the world that you reopened for business.
How do you know that your business is headed in the right direction with spending, managing productivity, sales, market share, and your future projections?
Your plan is working if your passing these seven markers of a successfully managed cash flow road map in the weeks and months after reopening:
- Your people are productive.
- Your message resonates with our customers.
- You have access to cash for emergencies.
- You are adapting.
- You know our burn rate.
- Costs are under control.
- You’re forecasting in and beyond uncertainty.
We partner with our customers for the long haul. Let us help you map out your company’s reopening.