Well, it happened. Not the way we all anticipated – it never does. But, it happened, and in a big way.
Now that COVID 19 has ushered in the deepest recession in our lifetimes, the central question becomes what actions should small businesses take to minimize operating risk and increase the likelihood of weathering the storm?
Here are some practical pointers focusing on your balance sheet.
A (Supply) Chain is Only as Strong as its Weakest Link
Now is the time to analyze supply chain risks. While this recession has been particularly damaging to consumer demand, it will eventually return. In the interim, consider whether diversifying your supply chain makes sense. Unlike large public corporations with diverse supplier bases, many small companies commit to sole source vendor arrangements for valid business reasons. In competitive industries (and let’s be honest, they’re all competitive), the pricing discounts and dependability of supply that accompany sole source relationships can mean the difference between short term profitability and loss. However, in times of shortage and scarcity, these benefits can be outweighed by the losses incurred if a major supplier fails or is otherwise unable to deliver product. Opening your vendor base to new suppliers can mitigate the risk of supply chain disruptions associated with sole source relationships. Conversely, if your business is dependent on an array of different suppliers for different parts, it is important to develop supply chain redundancies for each critical part. One additional pointer: since supply chain disruptions can occur at any link in the chain, it is important to look beyond your immediate supplier relationship and develop visibility into upstream tiers.
Analyze Your Customer Base
Just as there is upstream risk associated with vendors, businesses should also look downstream for early warning signs of financial stress in the customer base. Since private companies don’t publish financial results much less announce when they are about to file for bankruptcy, you might only discover the problem after the fact. In such cases, vendors are entitled to obtain adequate assurances of payment before continuing to ship goods or provide services. If you are a critical vendor, additional remedies may be available.
Short of the bankruptcy filing of a customer, there are some telltale signs to watch for: customers with large outstanding unpaid balances that are falling further behind on payments; changes in payment patterns of customers that were previously consistent payors suddenly becoming inconsistent; turnover in the accounting department or accounts payable staff; or inability to reach your normal contact at the customer. If these behaviors emerge, it pays to be proactive. Consider seeking advance payment, “cash on delivery” terms, a bank letter of credit, a personal guaranty or a perfected security interest in the goods sold.
Diversify Your Revenue Sources
In a downturn, just as fewer suppliers result in greater risk, companies with fewer revenue streams and customers are more vulnerable than companies with more diversified revenues, customer relationships and products. If you are a wholesaler of industrial cleaning supplies and you historically sold into the restaurant or education sectors, now might be the time to pivot to hospitals and healthcare providers. If you’re a restaurant owner, time to ramp up your takeout and delivery offerings. If you own and operate fitness clubs, start thinking about home rental of your fitness equipment. If you’re a manufacturer, there is nearly limitless demand for PPE and related medical supplies. And so on. In addition to repositioning your current products and service offerings to new communities of buyers, maybe it is time to develop entirely new products and services. Looking at your company’s core competencies (the so-called “what are we really good at” question) can yield surprising insights and opportunities.
“Variablize” Your Costs
When a slowdown occurs, businesses must examine all significant components of their fixed cost structure. Demand-driven recessions like the current one often result in dramatic, if temporary, reductions in revenue. In this environment, you need to take a close look at your overhead costs and identify opportunities to remove non-essential expenses from the cost base. One proven method of converting fixed costs into variable costs is by outsourcing non-core business functions. An entire sector of the economy is now devoted to providing outsourced services across a wide array of business functions including staffing, facilities, IT and manufacturing, to name a few. A smart outsourcing strategy can enable your business to mitigate (or avoid altogether) certain costs and risks which can significantly reduce your cash burn and improve your break-even operating position.
The post-COVID landscape is likely to look very different, it’s time to prepare for it.
This post was written by David Jaffe
