Greg Herring, founder and CEO of The Herring Group, and I recently came together in a webinar to present key financial strategies to help businesses rise above the challenges they’re currently facing. These strategies have been used through various economic downturns, including the recession in 2008 and other uncertain times.
Good times and strong revenue tend to cover up underlying inefficiencies and ineffectiveness that are revealed in hard times. While the impact of the COVID-19 pandemic and the subsequent economic slowdown may not have the same long-term effects as the 2008 recession, the situation may expose existing issues within many businesses. The following strategies can be used to resolve any underlying issues—in good times and bad:
- Develop 30-day operating budgets
- Address your balance sheet
- Manage overhead
- Get “all hands on deck”
- Utilize SBA loans to their full potential
Strategy #1: Develop 30-day operating budgets
Before the beginning of the year, many of you likely sat down and developed a budget for 2020, but due to some businesses being shut down—and others slowed down—the budget was thrown out the window. But the business practice of creating a budget and sticking to it can’t disappear. When the future is hard to determine, it’s time to redevelop your budget EVERY 30 days to forecast your work (revenue and cost of goods), overhead, and debt service.
Information you need to produce the budget of revenue and cost of goods comes from signed contracts, construction work in process, sales pipeline (with respective probability to close), and re-scoped contract services. You must determine—accurately—your anticipated revenue as well as the cost of labor and materials needed to fulfill those services.
Managing labor hours is vital. But now is the time to tighten your grip to maximize the impact on your payroll and cash flow. Managing your cost of goods sold makes a strong impact on your business and financial burden.
Strategy #2: Address your balance sheet
A weak balance sheet (lots of debt in relation to equity and revenue) takes years to fix. Considering the current economic downturn may be shorter lived than the recession in 2008, this may not be a high priority. However, that doesn’t mean that this strategy should be ignored. Building a strong balance sheet can help your business weather storms for years to come while also building confidence with lenders and improving your borrowing ability.
If you don’t already have a line of credit, take advantage of low rates and get one! Even if you don’t necessarily need it, borrowing and paying back quickly builds confidence with your creditors. Also, don’t be afraid to negotiate terms and rates for long-term debts. At the end of the day, everyone wants to get paid, and if payments need to be drawn out to do so, most will accept those terms. Do not suddenly stop paying or lowering your payments without discussing options with your lenders first. Once again, being proactive builds confidence with lenders while enabling you to negotiate more reasonable terms and rates to help endure tough times.
Strategy #3: Manage overhead
One of the most personally difficult things to work on is overhead expenses—as so much of this expense is related to people. The larger your organization, the more difficult your staffing plan. You should review your organization chart—including information regarding employee pay and benefits. With the organization chart, run through various possible scenarios that could happen and how your organization will need to adapt to those changes. This could include everything from layoffs, pay cuts, or restructuring the org chart. Work that you may have been doing in-house, like mechanic work, now may need to be sourced through other means.
You may also need to restructure your expenditure budget. Reevaluating how much money you will allocate to suppliers can create a huge impact on your business. Most of all, you should also make sure that your current technology is providing you with the right information, quickly and accurately. Having the right technology in your hands at a time like this provides you with the tools to make your job easier and provides a great return on your investment.
Strategy #4: Get “all hands on deck”
When times are difficult, everyone needs to buckle down to weather the storm. Jobs and duties may change to adapt to the current situation, and it’s important to communicate that to everyone. Your team members are all adults and are aware of the situation, so there is no need to beat around the bush. Open communication will go very far. Explain the details of the possible changes to your staff and how that will affect them, the costs, and the benefits. Get everyone on the same page and continue to communicate to keep everyone motivated.
Strategy #5: Utilize SBA loans to their full potential
You likely already know about the Paycheck Protection Program of the CARES Act, but there are a few details that you should remember. The PPP loan is 100% forgivable and is not taxable, but there are some stipulations:
- You cannot have a reduction in FTE (full-time equivalent) headcount.
- You cannot reduce total employee pay by more than 25%%.
- Payroll cost increases, rent, utilities, and interest must combine to be greater than 2.8 weeks of payroll costs .
- Loan proceeds may ONLY be used for payroll costs, healthcare benefits, rent, interest on existing debt, and utilities.
- It may be possible to delay the start of the 8-week period by waiting to sign the loan documents.
- If the conditions are not met, any loan amount not forgiven is carried forward as an ongoing loan for a term of two years with an interest rate of 1%. Principal and interest payments are deferred for 6 months.
There are many other strategies you can take to help your business, but as the economic climate continues to change, considering a few of these financial strategies can ensure that your business survives and continues to grow.
Below is the related webinar on this topic that provides additional details.