We are facing a global phenomenon that is unique. But in terms of our economy, we are not facing something unprecedented. We have seen downturns and survived them before. In my landscape career, we have experienced this at least four times (1989, 1993, 2001, and 2008). My objective, in writing this piece, is to address the potential economic severity of the government’s response to this phenomenon (over which you have little control) and outline a business response to weather it.
Two variables will determine the overall significance and impact of this event; (1) its duration (how long before America goes back to work), and (2) the underlying fundamentals (supply, demand, confidence, and capital).
Duration: The stats regarding the virus suggest that current measures (shutting economic activity) are a cure worse than the disease and are a function of politics (not left versus right, but information and risk tolerance). Odds are we will be back to work—not back to normal—within the next month.
Fundamentals: They are very good. By analogy, if the economy were a patient—in 2008, the patient was very ill and laying on the operating table, facing a long recovery. Today, the patient has been sent to their room, the door locked, and they are waiting for mom and dad to open the door and let them out.
Impacts and Significance
There are four inter-related areas of business that will be affected—some to a greater extent than others.
Revenue: Your revenues will decline year to year. Forget about your 2020 budget and start over (see sidebar: Budget). I interviewed the CEOs of companies whose collective revenues exceed $1 billion. These represent a consensus:
- Contract maintenance revenue will be off by 10 to 15%. The extent is segment dependent (see table 1: Contract Segments). Clients are canceling and suspending work, specifically services like spring color and mulch.
- Enhancement revenue will decrease by 20 to 40%. Again, the extent is segment dependent.
- Construction in the commercial world is not terribly affected for the spring. The real concern is current bidding for fall 2020 and spring 2021. However, residential is an entirely different animal. Residential could be a bit of a bloodbath in the spring but fall 2020 and certainly spring 2021 could see a strong recovery.
Labor: All the CEOs interviewed are not overly concerned with labor supply, for some obvious reasons. The larger concerns are keeping key people and the impact of the associated fixed cost.
Overhead: Fixed costs in relation to declining revenue can be have crippling financial consequences. The CEOs are eliminating non-essential spending. There is NOT a lot of non-essential spending in their budgets. In other words, the overhead reductions they see may be necessary and painful. There are really only two areas where significant savings can be realized quickly: overhead staffing (people) and vehicle/equipment/shop. These two categories comprise 70+% of overhead expenditures. It is difficult, if not impossible, to suspend rent, insurance premiums, debt service, and utility expenditures. Again, the sooner America gets back to work, the less severe the cuts.
An interesting dynamic occurs in good times. Managers become less disciplined about expense management as revenue covers many bad expenditures. Now is as good as time as any to re-instill this psychology and discipline. Letting people go is not enjoyable—and I am not happy about it ever—but it is likely the reality.
Financial: All the above affect liquidity and the balance sheet. Liquidity and balance sheet management are essential to survival. The more liquidity (cash), the better. Think quick ratio and the less debt, the better as well as considering debt service to revenue ratio.
In summary, the financial impact of this will be significant, given that shutting down the “landscape spring season” is like retailers missing Black Friday.
I have worked with over 300 companies during my consulting career (1986–2014 when I started The Aspire Software Company). During the 2008–2013 event, my clients executed strategies to not only ensure survival but strong positioning once the crisis ran its course. These were the tactics:
Rule one in a crisis is maximize confidence to minimize panic. It is essential to re-build your 2020 budget, but you should operate on very detailed 30-day cash budgets. I will address fixed-cost overhead shortly, but these 30-day budgets are based primarily on two variables: invoicing and labor payroll. This depends on accurate contract service and budget hours detail.
The biggest challenge I faced with my clients in 2008 was getting accurate information. It took a long time and some we had to “swag.” In talking with one CEO who uses Aspire, he said, “Kevin—a year ago, we could not have done the proper modeling necessary to build a 30-day budget.” In Aspire, everything you need is available on the work ticket—either “in production” or in “pipeline.”
Rule two is maximize cash flow. Liquidity is a function of the cash from your 30-day budget combined with balance sheet Accounts Receivable (AR), Accounts Payable (AP), and Line of Credit (LOC).
AR (Accounts Receivable): Accelerate collections.
Where possible, invoice every day, not weekly or monthly; assign responsibility to everyone (office and AMs) to collect outstanding invoicing (it’s called your Aging Report).
AP (Accounts Payable): Decelerate payments.
Talk to your suppliers and subcontractors to extend terms. DO NOT just stop paying without involving them. They are equally strapped, and most will be willing to work with you—and they will remember your professionalism in the good times to come.
LOC (Line of Credit): Obtain one if you don’t have one and use it if you do.
Even if you do not need cash, borrow and repay in the short term. Banks make money when they loan. Use the line and pay back to build confidence with your bankers and back it up by sharing your 30 to 60-day budgets.
Strong Balance Sheet
In 2008, several of my clients had terrible balance sheets. They had debt that, when construction collapsed and developers failed to pay their bills (often in the millions of dollars), debt service overwhelmed them. You can fix a P&L in a few months, but it takes years to fix a balance sheet. The key is to address LTD (long-term debt) with your bankers. Use your annual budget and 30 to 60-day operating plans to re-negotiate terms and interest rates. Interest rates are impossibly low right now. Banks, by small and large, have strong balances sheets right now. Because of this, they may be willing to be flexible. Interestingly, those with the worst balance sheets have the most leverage doing this.
New Sales: Do not downsize your sales force. In 2008, we doubled down on our sales efforts. First, we did a sales pipeline “hard scrub” to determine close probability. We applied a 100/50/0% probability to every proposal. We created 100%, 50% and 0% columns with a rule that only 10% of proposals could go in the 50% column (essentially a “maybe” close). It soon became obvious that there was not much in the 100% column. We then used whatever CRM we had to create a prospect pipeline (“Santa Claus list”) and had the sales team use a “we are healthy and here” campaign. The message: we will work with you and have the means should your current contractor not be willing to help. Harsh? Maybe—but failures are common in a crisis and flexibility is the first casualty when people are under stress.
Existing Sales/Customers: Rule three in a crisis—get in front of your clients and work with them. We re-deployed sales and production staff to make this happen, where necessary. We focused on the Four Rs: Retain, Re-scope, Re-budget, and Reassure. We built a service and revenue plan for each client to instill confidence by suggesting short-term service alterations considering long-term impacts to property and budget.
Overhead: People vs. Paperclips
Rule four is to reduce fixed expenses. This is a tough one. Table 2: Overhead Spending makes it obvious why this is painful. You have to eliminate “non-essential” (paperclips) spending. But, as the table shows, 70% of overhead is in overhead payroll (people) and equipment/vehicle expenses. The latter provides some opportunity for reduction like (1) no more equipment/capex purchases, and (2) reduction in fuel and repairs due to decreased services. But there are limits as so much of it is “fixed,” except parts purchasing. Stop that for certain.
This means that, in the short term, overhead expense saving must come from payroll. This is not fun. In 2008, we pulled the trigger on payroll reductions fast. The challenge then became, “who will do that work?” Over-loaded and frightened people (worried about their jobs) quickly become less productive. This may be self serving, but now is NOT the time to reduce technology spending—quite the opposite, if you want your smaller team to stay motivated and get the job done without drowning.
In 2008, construction work dried up in about one month…gone. It did not return for six years. This was the time when everyone swore off construction and became commercial maintenance companies. Fast forward to 2018, and construction is booming and a great business again. (Talk about your short-term memory J).
Petition the Government
Contacting local and state officials individually and through associations (both business and industry-specific) is essential to affecting the ONE major variable: duration. We do not control this—they do! It is essential to apply pressure to get America back to work. Now is the time to do this, as there are indications that the cure is worse than the disease at this juncture.
In summary, this situation will have a significant impact on 2020 budgets. The underlying economy is far better now than the last time we experienced a downturn. What we did with my clients then worked—and it will work now. But you must act immediately. There is a tendency to “get fat” during good times and lose financial and business discipline. Getting all hands on-deck with frequent and transparent communication is essential. Trimming “C” customers and people will have a beneficial long-term impact, and investing in technology to replace people will pay off.
We will survive this as we have all the others. We do not control the duration. But all the rest we do—so take control!