On behalf of PKF, we would like to share with you a few tips that we thought will be useful as we deal with this unprecedented time in our lives.
We fully understand that all of us are concerned but we suggest that all businesses and companies remain calm, responsible and continue to consider the interests of their stakeholders including staff, customers, suppliers and society so as to provide a balance of profit protection.
As we confront this global pandemic, let us consider what it means for our businesses and our economy. These tips are aimed at helping businesses sustain and survive any economic or business downturn that may arise as a result of this global pandemic.
An economic downturn has a way of spreading through the supply chain. It could hit any of your buyers before you, and their problems quickly become your problems.
That’s why your revenue shouldn’t be heavily dependent on a few customers. Look over your customer mix. If any single buyer represents more than 10% of your business — or your top five clients together account for more than 25% — you need to diversify.
There are plenty of options for expanding your customer base. You might broaden into other markets or ramp up your marketing budget for next year. Find ways to forge a variety of new relationships and add many small revenue streams.
When times get lean, you’ve got to know what you can live without. Every entrepreneur should be able to spot the small indulgences that are eating away at profits without stimulating growth. Knowing the difference between what’s discretionary and what’s essential is critical.
Look at vendor output and decide if you can hold off on online advertising, web design, accounting, or other miscellaneous services. It’s possible to go too far with this — marketing is important, even in the direst circumstances. Nonetheless, you should scour every line item and trim the budget where it makes sense.
When it comes to recession preparation, conventional wisdom for personal finances applies to business as well. Who knows when your cash flow might dry up or banks might tighten up on lending? You need a healthy emergency fund to weather a downturn.
Even a start-up should integrate plans for an emergency fund into its business plan. Keep a separate account for savings so you’re not tempted to dip into it for standard expenses. Your target balance will depend on the size of your business, its volatility, its revenue, and its margins. Consider it a good start if you have enough to cover three to six months’ worth of expenses.
Take a walk through your warehouse. How much cash is tied up on your shelves? That’s cash that will be much harder to liquidate during a downturn.
Learn to think to learn about inventory, even to the point of bucking trends within your industry. Tesla is a prime example: The auto manufacturer has rejected the standard auto sales model and essentially makes its cars on demand.
You might not be able to go that far, but ask yourself how much you really need on hand to meet demand. This might require more advanced methods of tracking, but the rewards in liquidity are worth it.
Debt compounds quickly when budgets tighten, so pay it off while you have the cash. If you’re following the first four strategies, you should have the cash to put toward paying down your debts faster. Start by knocking down your higher-interest loans first, then move to the others.
It’s also important to manage debts on a relational level — both what you owe vendors and what customers owe you. Building relationships can be the single biggest factor in your organization’s successful avoidance of the bankruptcy domino effect.
Recession may be looming, but there’s still time to dodge that domino effect. Businesses that are proactive in managing their finances will be set for success, regardless of when the next storm comes.
From a human resource perspective, the organization should be able to answer the following questions to give stakeholders confidence:
Do not underestimate the time it takes to plan for disruptions. It is critical that business continuity plans are not just developed but that they are practised.
Roundtables or simulations are invaluable to verify activation protocols for different phases of response (contingency planning only, full-scale response, other). It is important to test communication protocols and functioning of core functions whilst operating with minimum employees.
According to McKinsey clarity on decision owner (ideally a single leader), roles for each top- team member, “elephant in the room” that may slow response, actions and investment needed to carry out the plan should be clearly defined. Consideration should also be given to providing teams with the opportunity to work from home and to gauge the impact on operations.
In case of any questions, PKF specialist advisors are able to offer expert risk management and business continuity planning advice and support.
PKF will provide guidance and implement solutions to ensure your business is able to withstand the challenge of the COVID-19 epidemic and to comply with good corporate governance standards.
PKF is focused on implementing practical robust solutions that will have long-lasting benefits for your organization. Contact us on firstname.lastname@example.org to discuss how we can support you.
This article was prepared by Wasim Manji: Corporate Finance, PKF Consulting Limited
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