Armanino Blog

COVID-19 Hot Half Dozen Things Small to Mid-Sized Companies Should Do Right Now

by John Kogan
March 19, 2020

Apple, with it's $200B+ cash on the balance sheet is going to be just fine. Even with roughly $35B of annual operating expenses, they could go without a single sale and still pay everyone for years. Small and mid-sized companies are not so fortunate.

The question we're getting asked most frequently is, "what should I be doing right now to reduce risk and get by?" Here are a half-dozen steps we recommend every company take to make life more predictable and survivable. Done well, you can come out of these tough times in good shape ahead of the competition.

Contemplate all financial stakeholder needs

You're not the only one worrying about your company's performance. There is a full spectrum of interested parties, and you need to have a communication plan in place, with data, for each of them.

Investors need an updated forecast and strategic plan. How do you intend to make it through, and will you come out the other side stronger or weaker than the competition? Take an aggressive role in this and go to them with your predictions, do not wait for them to ask you.

Do you have any debt? If so, your lenders (banks or third parties) will be highly interested in your cash forecast and covenants. Some may temporarily waive covenants, and you should be on the phone to them yesterday to give them your current state, your strategy and your forecast, along with discussing what they can do for you right now.

You need to know whether your clients are still your clients, and whether and when they are going to pay you. Not making those "client check-in" calls leaves you in the dark on accounts receivable, which you can ill afford. Why not show your concern for them, get an update, and keep the relationship strong while you're at it?

The flip side of your clients are your suppliers, who certainly want to know how you're doing and a) whether you will continue using them (that is, will you remain a client and to what extent), and b) when are you going to pay them? The pattern here is working capital plus cash are king.

Last but not least are your employees, consultants and contractors. Of course, you need to know what you're going to do with them — many notes on that below — and communicate your plans. Nervous people tend to be less productive, and honesty and transparency are appreciated. Once you have your updated strategy and forecast in hand, spend time communicating throughout the company if you haven't done so already.

Re-build your core business forecast

Oops, someone moved your chair and the music stopped. All those old assumptions just flew out the window and you now need a new grip on your reality. Building a truly solid forecast helps you understand what you're facing and what your options are.

If you're pre-revenue, update your go-to-market timeline and recognize all of the cost and cash impacts that you will have. Does it take you longer to get to revenue? Will you need to sustain expenses longer to get to your launch?

If you're already in revenue, consider the business impacts of the virus on your and similar products. Who are your buyers and how are they impacted? Has buying slowed? Have payments slowed? Do you have COGS and a supply chain you need to fund?

High-level, annualized forecasting won't work here. You really need to get into the engine room and examine every driver of revenue and expense at a monthly granularity, running multiple up- and down-side scenarios (which is easy if you set up the model and drivers well).

This is the financial plan you use to set expectations and drive operations. It's your best roadmap.

Examine your revenue and OPEX line-by-line

Impacting your time to live is all about math. Anything you can do to increase revenue and its attendant collections, improve your product or service margins, or reduce operating expenses and control the attendant payments serves to decrease cash "burn" and increase your company's life.

In times like this, clients may delay or cancel orders. A revenue analysis serves to highlight your top clients, providing the ability to triage them, determining who to serve and communicate with, and maximizing your odds of collecting from them (and giving lower priority to the ones you think may be a loss). The priority is near- and mid-term cash collection. This analysis will shed light into future sales effort prioritization.

Operating expense (OPEX) reduction is painful to contemplate, but it makes a tremendous difference when maximizing time to live. You should go through your OPEX line by line for the past 13 months. Why so far back? Because some expenses are annual and you won't even see them in your P&L unless you go back a full year and then some.

Review expenses by provider, understanding what they are for, who they serve in the organization, what department drives them, and whether they are directly product-related. In other words, is an expense related to driving revenue now or in the future, does it relate to collections, administration, marketing, etc. The goal is to determine what is truly necessary spend and what is not, across multiple time horizons and downturn depths. This is where hard decisions are made and experience counts.

Build monthly, weekly, even daily cash forecasts

Depending on your current cash position, building highly specific cash forecasts may be appropriate. This takes work, but you can forecast cash to the day if you understand how.

Every inflow and outflow can be lined up and expectations weighed in order to enable great visibility into your short-, mid- and long-term cash position. If you are thin on cash (and working capital) this becomes a critical tool. In challenging business times, a CEO and their finance leader confer on this daily, deciding what to pay and what to put off, as well as who to call for collections, what projects to complete, who to hire, lay off, etc.

Prioritize ̶ what you thought was bone and muscle might be fat

The analyses above will set up a litany of tough questions for your leadership team, and most especially for the CEO and CFO. When push comes to shove, things that were formerly considered "must-haves" may now be "nice-to-haves" or may even be discarded out of hand. This is about brutal prioritization. A company that doesn't make it through to the other side of challenging times may as well return capital to investors right now. It's that stark.

Every expense, internal and external, is subject to debate.

Make the hard decisions faster than you want ̶ just live!

When you have determined your bone, muscle and fat, it's time to make decisions. It's okay to feel conflicted, but if it's a question of survival or a question of coming out ahead of or behind your competition, you need to make hard decisions and remain steadfast.

Speed counts because every day you pass without taking action is time you take off of your company's life that you could have used down the road. Delay removes options, even if you feel like certain expenses are on your path to profitability. Nothing is more important than making it through the hard times and giving your company the chance to thrive on the far end.

This is where steady, experienced hands are especially valuable. They have been through challenging times and can see tough decisions through. Let's face it, the preference is to bring some employees through to fight another day rather than hitting the wall for all.

Our veteran Finance Performance Improvement team has decades of experience running companies and their finance organizations, including through many hard times. Through the "art and science" of corporate financial planning, analysis and strong financial leadership, we can help you manage your current situation and chart a path to your best future outcomes.

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