In order to provide guidance on future business strategy, we thought we would take some time today to look back at what happened when the pandemic first broke out in March 2020. As a financial consultant, we provide our clients general best practices on review of the internal business. However, admittedly, when a company is in growth mode and looking to expand revenue or commercialize products, internal processes fall by the wayside and rank low in priority. When the pandemic broke out, this forced business owners to hit the reset button.
IT Infrastructure
The very first event were office shutdowns. Many companies were still operating on a paper-based system and were not effectively digitizing documents, nor did they have databases to efficiently pull up information. One of the first significant changes was the implementation of necessary IT infrastructure. In most cases, it was a priority on the list, but fell further down below business development activities. In a few months, businesses developed tools for staff communication, task management, project management, CRM and ensured all important documents were digitized. Whether businesses remain working from home or end up going back to this office, this was a necessary and important step to set up for growth.
Vendor Relationships
The next major event was requests from vendors to change payment terms. For businesses in wholesale, retailers immediately started to phone and requested an increase in payment terms for their product. Big box retailers took advantage of their size and leverage and extended terms 30-60 days. Smaller vendors phoned and pleaded for more time to pay their bills. This put a considerable amount of pressure on cash flow for small businesses. Working with our clients to navigate through this difficult conundrum, we asked our clients to determine how much value they placed on each vendor relationship and how easily each vendor could be replaced. For those that were highly valued we would either concede to revised terms or counter with our own proposal. For example, when one of our clients were asked to extend payment terms with a big box retailer, we advised them to counter with a 2% discount to maintain payment terms, and the offer was accepted. For vendors that were underperforming or could easily be replaced, we stood our ground and started to shop for comparisons.
While going through this exercise, we asked our clients when they last completed the following activities:
- Reviewed vendor agreements
- Ensured vendors were adhering to terms of the agreement
- Revisited terms to determine if they required revisions based on the business evolution
- Compared pricing to other comparable vendors available in the market
In most cases, businesses in a high growth mode have not completed any of these activities since they started these vendor arrangements often several years ago. Upon doing this review, we drew a number of conclusions:
- In some circumstances, we discovered that vendors were not fulfilling 100% of the agreement and certain deliverables had been omitted either from inception or perhaps in the last few months.
- With respect to suppliers of raw materials or finished goods, our clients were ordering a higher volume than when they first began the relationship. We used this as leverage to negotiate better pricing or push back on revised payment terms.
- Our clients did a deeper dive into service provider performance. As an example, they looked at their digital marketing agency and reviewed concepts like impressions, conversion, and user acquisition costs. In some cases, they found underperformance. Under these circumstances, there was an opportunity to either revamp the marketing process, adjust pricing, or find new vendors.
- Businesses found costs mainly related to subscriptions that were unnecessary for their business.
- Most small businesses replaced at least one vendor during the pandemic.
Human Resources
The next big decision was on personnel. CEOs had to identify key employees they could not lose, which staff could be placed on a temporary lay-off and which staff should be terminated completely. It was not uncommon for businesses to lay off or terminate 30-40% of their workforce between March and June 2020. However, for the business to continue to operate, business owners had to rethink their entire organizational structure. Here are some of our observations from this exercise:
- People were often sitting in the wrong seats based on their skills and experience. Some employees were underutilized, capable of taking on larger roles and some employees were in over their heads.
- There were inefficiencies in workflow. In some cases, there were redundancies where two people were overlapping on the same tasks and in many cases there were inefficiencies or workflow that required verification or review by a supervisor.
- Without clear corporate or departmental goals established, employees were prioritizing tasks that were not vital to business growth. Clear job responsibilities were established with more guidance on prioritization.
A 30% cut in staff did not necessarily lead to a 30% reduction in productivity. During the pandemic, key employees were given the opportunity to step up in into greater leadership roles and take on more responsibility. When wage subsidies were announced, many small businesses actually found that they did not need to hire back the full headcount they previously had and figured out how to operate the business with a leaner structure.
Financing
With cash flow becoming a larger issue, we turned our attention to financing. The government offered a number of programs to provide relief through wage subsidies, interest-free loans and rent relief. However, the majority of companies that we spoke to had not explored bank financing in years. They were either rejected for a loan at a very early stage or had an existing line of credit that had not been reviewed. In a situation where the business has experienced considerable growth since the last discussion with their banker, we helped our clients prepare business plans, COVID impact writeups and financial projections. We were successful in helping our clients either secure a line of credit for the first time or increased lines during the pandemic, in a period where banks were quick to say no to lending.
Conclusion
So, where does this all lead us? The pandemic actually provided an excellent opportunity for businesses to hit the reset button and take on initiatives that had always been sitting in the back burner. Coming out of the pandemic, entrepreneurs have now seen the value of looking at their business internally. We are cautiously optimistic that business owners will implement internal processes that periodically review:
- IT systems
- Vendor Agreements
- Cash term arrangements – receivables and payables
- Organizational Structure
- Bank financing and other sources of capital
When you consider the discoveries made, many small businesses were operating at a cost structure 20-30% higher than it needed to be for years and had inefficiencies in their org structure that were hampering productivity. To put things into perspective, for a business that has $1,000,000 of annual costs, we have helped them cut $200-300K in annual cost reductions. Business owners tend to focus on the top line looking for ways to increase revenue and gross margins. However, they often ignore the fixed operating costs related to IT, vendor agreements and personnel once things are set up. Taking some time to shore up resources may be the easiest way for a business to achieve greater profitability. It is our hope that businesses will continue to review internal processes once we come out of the pandemic.