Turnaround Strategies for a Business in a Crisis
A crisis can occur with any business at any time. It’s better to expect they will happen and be prepared than to be caught off guard. There’s no better example of this than the COVID crisis.
We’ve outlined several tactics you can implement across multiple disciplines when facing a crisis that should help get the juices flowing.
Crisis Team
You don’t need to go it alone. You’re only as strong as the team around you. Although we are showing a list of professionals below that you’ll need on your Crisis Team, this is really a team you should have in your corner during the good times.
Your crisis team should include:
Accounting Team (Internal and/or Outsourced) <—- That’s Basis 365!
CFO (restructuring, M&A, finance planning)
CPA (tax planning)
Personal Financial Planner (impact of pass-through businesses affect their whole tax picture)
Insurance Agent (review, assess coverage, or change various insurance policies)
Business Coach (someone to help you make tough decisions and lead your team)
Bankruptcy Attorney (talk to them early to assess impact or options)
Collections Attorney (someone to help you collect on unpaid invoices)
Business Attorney (assist in reviewing customer or vendor contracts and actions you can take or need to be prepared to face)
HR Expert (to make sure you are compliant with any actions you take like lay-offs or salary reductions)
Turnaround Strategies for Distressed Companies
Financial Analysis / Planning
One of the first things to do during a crisis is to determine your financial position. Review your cash flow, cash reserves, and credit availability.
Run financial scenarios for good, bad, and ugly. Determine what targets are needed for each scenario. These may be scenarios based on revenue changes to plan lay-offs/furloughs, reducing rent, assessing a new line of business, or an acquisition. This type of planning is beneficial for business owners to understand their targets to accomplish their goals. These scenarios also may be useful to show to a banker or investor to show you have a plan, and you are on top of your numbers.
Develop a 13-week cash flow plan. Cash is critical and can sometimes get lost when looking at accrual financial statements. Map out expected cash receipts and plan out expenditures to understand how cash will trend and determine what can be spent, and when, or how much money should be pulled from a line-of-credit or loan to apply for.
Hoard cash during uncertain times as a business. Consider taking out loans or maxing out your existing lines of credit, so you have cash on hand. You may need this to take advantage of reduced product costs if you buy in bulk or acquire a struggling competitor you might not have normally acquired. Defer existing loan payments by talking to your banker.
Operations
Review your upstream and downstream supply chain for inventory-based business. Focus on what sells best and make sure you have everything in place. If you have a strong balance sheet, consider purchasing in bulk while your competitors are down, and you have the leverage to negotiate better pricing.
Service businesses should closely monitor utilization and realization. Ensure your team is being most productive (utilization), and you can collect on that earned revenue (realization). Make sure project time is entered timely and accurately daily. Monitoring utilization and realization is even more critical during crisis situations because you don't want employee idle time does not generate much-needed revenue and/or spending time on a job that can't be billed or is over-budget worsens the cash position.
Product-based businesses should manage their POs carefully and protect their best selling products. Review churn and profitability on your product lines / SKUs.
Consider ways you can pivot. Be creative. Sit down restaurants need to deliver. Caterers need to be sending meals and setups to customer's homes versus to a restaurant or hotel ballroom. Collect payments with mobile apps versus touching credit cards. Your business coach may be able to facilitate brainstorming sessions with your team.
Cut out unnecessary tasks - become more efficient. Your business coach may be able to lead a Lean Six Sigma Kaizen event or other methodology.
Morale is critical as a business is only as strong as its team. Your business coach can assist with team-building exercises or internal communication protocols.
Acquire competitors that may be weaker to increase market share. Utilize hoarded cash and/or financing through your banker.
Assess if a new line of business has opened up due to the crisis.
Sales Invoicing / Accounts Receivable
Segregate your customers to determine who is likely to pay on time, who "might" pay on time, or those you know have businesses facing challenges that will probably not be able to pay. Break down the AR Aging.
Be attentive to those customers who will pay.
Talk to customers who "might" to get a good read on what to expect.
Ensure that plans are in place to stop work quickly on those who are unable/unlikely to pay.
Talk to those customers to assess of a scope change is possible to reduce the amount invoices or determine if a payment plan or strategy is possible. Don't do work for free if you are urgently trying to keep your business alive.
Collect faster on open invoices or future invoices. Consider switching to deposits or retainers versus invoicing in arrears. Include links to online payment services to they can pay online instead of by check.
Consider late fees or interest on past due invoices.
Collections attorney may help with options for past due invoices or contracts.
Cash Disbursements / Accounts Payable
Slow pay or no pay vendors if you can. Prioritize critical vendors to your business.
Negotiate payment terms with vendors and pay in arrears versus upfront. Negotiate payment plans for large purchases and ask for discounts on any purchases.
Review vendor contracts to determine what options you have. The force majure clause may allow the agreement to be voided or provide reduction for some time like during war or a pandemic. Other rights may exist in the contract to terminate. If not, attempt to negotiate.
Negotiate with your landlord
Reduce or defer payments by extending the lease. Storefront square footage may have been based on walk-by traffic rates. Those have drastically changed, negotiate on $ / square foot? Consider a broker to negotiate for you as they know what levers to pull.
Reduce the square footage needed. If your business had to lay off staff, the less footage you need for your business.
Review insurance agreements to determine if insurance coverage requirements have decreased. With reduced office space and fewer employees, risks have changed. Do they cover any emergencies the business is facing? Can the premiums be negotiated down or refunded?
Reduce services you pay for like less internet if nobody is at the office. Pause utilities or ask if they can defer/reduce payments. Stop paying for recurring software changes you may not need or reduce user licenses.
Debt / Financing
Defer loan payments or temporarily switch to interest-only payments. Show the bank your scenarios to gain trust. Come in prepared. Show your intent is to pay, but you need to stay in business to do so.
Take out loans or draw cash from your line of credit to hoard cash.
Apply for emergency loans when available.
HR / Payroll / Personnel
Defer payroll taxes where available.
Furlough staff versus layoffs so your team can come back when the business is ready.
Consider reducing hours or salaries versus layoffs.
Owners (S-Corps) should switch some or all of their payroll wages to distributions to defer the payment of payroll taxes until their personal tax returns are due.
Make your team be accountable by hitting targets. Rally your team together to help win the fight during challenging times. Don't become a big brother, but the team needs to be more accountable than ever.
Consider letting go of the lowest performers.
Hire talent. During an economic downturn, more people are looking for work than usual. Replace mediocre talent with top talent.
Outsource specific roles like accounting, HR, or IT. Keep people on payroll that create and deliver what you're in the business of selling.
If lay-offs are needed, plan those out in your scenarios, so you know what financial triggers will require staff reductions. Determine how those individuals will be selected, and work with HR and CFO, so the plan is ready if it's needed.
The Wrap Up
Now is the time to adapt and survive. Your competitors are pivoting and trying to be creative. Build your Crisis Team and navigate your way to a more profitable, streamlined business so you’re ready to scale as lock down lifts and we able to get back to normal.
