Maintaining Profitability During COVID-19

Maintaining Profitability During COVID-19

April 7, 2020
5:31 pm

The COVID-19 outbreak has proven to be a significant exogenous shock, impacting both demand and supply sides of the world economy. Given the universal drop in generalized demand and supply chain distress, many businesses are threatened with short-term liquidity shortages and weak long-term consumer prospects.

Contact our Bâton Global data-analytics team for on-demand support managing liquidity and dynamic scenario planning

Starting in March 2020, fiscal and monetary authorities worldwide deployed various economic stimulus plans to counterbalance quarantine measures. Meanwhile, respected corporate leaders and forecasters have cut their economic and sales forecasts for the year, while small business owners are calculating their remaining operation runway timelines.

At Bâton Global (B|G), we recommend leaders address imminent business threats while wearing their crisis leadership hats. We outline 4 key focus areas to address the short-term liquidity and profitability problem:

Short-term Liquidity Problem

Get the house in order

In times of crisis, balancing execution speed with impact to the firm is the first priority. However, chaos and rapid change during a crisis may hinder organizations from achieving these objectives. Hence, it is important organizations enable quick decision-making by proactively managing data towards actionable insights, formulating data-driven solutions, communicating plans clearly to their workforce, and tracking impact.

These tasks can be streamlined into the following action steps:

  1. Activate the crisis team: No organization can afford inaction during a crisis. Corporate leaders should establish a crisis team that enables cross-functional decision-making. Ensure that all senior executives are part of the crisis team not only to accelerate approval but also to avoid siloed information processing. Once formed, leadership should establish a clear timeline demonstrating the length the team will operate based on CDC or industry guidelines.
  2. Assess the situation: Use crisis teams to frequently assess emerging scenarios and business implications. We recommend daily meetings with all key stakeholders to drive quick situation assessments and responses, including balance sheet management. The unprecedented effects of COVID-19 exceed most annual business planning assumptions and warrant iterative adjustment throughout the coming weeks.
  3. Establish organizational alignment: The crisis team should be used to secure alignment and buy-in from senior leadership. Such buy-in is essential for defining what to do and what not to do, ensuring that your organization saves resources for mission-critical tasks. We recommend leaders consider hiring independent external parties as crisis team partners to build and secure alignment, enable quick strategy execution and ensure high-quality decision-making.
  4. Communicate and track decision impacts: Once decisions are made and alignment secured, use the crisis team to communicate decisions and monitor smooth execution. As communication centers, cross-functional crisis teams can ensure messaging is easy to interpret – as well as hard to misinterpret. The teams should also develop scorecards to track the implementation progress and impact to assess their effectiveness. Success criteria should effectively communicate and demonstrate where there is deviation from the organization’s standard operating procedures. Check out these additional best practices in successfully guiding an organization through crisis conditions.

Conduct dynamic data-driven scenario planning

Due to the shifting market forces and uncertainties created by COVID-19, organizations are required to make profound changes to their organizations’ budgets and plans. Scenario planning – powered by data – is an effective way to challenge prevailing mindsets and reconsider the range of future possibilities due to implications of the virus outbreak.

B|G has found that organizations tend to rely heavily on the expertise and intuition of leaders when planning for the future. Although knowledge and expertise are paramount in effectively operating an organization, data analytics can provide a more robust and widespread understanding of possible outcomes. Organizations have access to abundant sources of internal data including sales and expense data, and data from outside forces greatly impacting the organization such as economic, sociopolitical, and industry data. To leverage this data and perform dynamic scenario planning, B|G recommends the following approach:

  • Identify relevant internal and external data sources
  • Utilize data analytics to create financial predictions
  • Leverage leadership expertise to refine the scenario planning model
  • Review scenarios and their implications during budgeting and planning

Data-driven scenario planning supports leaders in making short-term decisions in times of crisis and long-term bets with a great deal of uncertainty. Effective scenario planning leads to increased margins, more efficient uses of resources, improved product differentiation, and less organization risk.

Maintaining Profitability

Balance sheet management fundamentals

COVID-19 has severely affected firms’ ability to sustain healthy revenue and cash flow figures. Thus, it is crucial for your organization to ensure balance sheet management excellence to optimize its cash cycle conversion through two key levers when possible:

  • Improving account receivables: Speed up collection and reduce recoverability risks. If analysis demonstrates a need to raise cash, incentivize customers to pay faster through discounts. While this step may temporarily hit gross margin, it will likely be cheaper than accessing capital markets or other sources. In tandem, assess customer recoverability risks, especially large receivable amounts involving customers who may be severely impacted by the COVID-19 outbreak.
  • Improving account payables: Firms should also consider slowing down their payments to debtors during the crisis to end of agreed upon terms. Leverage crisis teams to assess the possibility of negotiating more flexible terms to lengthen account payable days.

Minimize the risk of eroding margins

The speed of the outbreak has prevented organizations from planning adequately for market changes, leaving them with steep declines in demand and relatively burdensome cost centers. Hence, there is an urgent need for firms to minimize profit margin erosion by optimizing revenue and costs as they wait for a recovery.

On the revenue side, leaders should develop short, medium and long-term plans to recover revenue. Three factors guide how firms can guard their revenue:

  • Change in customer demand: To stimulate customer demand, we recommend companies leverage Agile methodology to unlock innovative solutions in reacting to changes in consumer behavior, as traditional segments stay home and practice social distancing.
  • Supply chain disruptions: Develop strategies to mitigate against supply chain disruptions – including diversifying your worldwide supplier networks. Even brilliant new offerings will be ineffective if the products or services cannot be delivered.
  • Price changes: Avoid incrementally increasing product prices during this period. Focus instead on maintaining a great customer experience through dependable pricing and keeping brand loyalty intact.

On the cost side, leaders should be laser-focused in preserving cash through cost-cutting measures. Prudent capital spending in the following key cost centers should be in place:

  • Human resources: Potentially institutionalize hiring freezes, offer unpaid leave, and institute temporary salary cuts for top management.
  • Marketing channels: Prioritize high ROI channels which may include digital channels and online marketplaces.
  • OPEX: Reduce non-core operating expenditures and delay lease renewal payments where possible.
  • Technology: Focus on investing in technology and automation.

It is also critical to align incentives by rewarding staff efforts to save so that cost reduction initiatives do not compromise revenue-generating capabilities.

Is your team prepared?

Leaders must communicate clearly and earnestly during times of crisis. The key is to establish alignment on mitigative strategies within your workforce – harmonizing initiatives across business units to hit the ground running in recovering from COVID-19 shocks.

Most organizations lack experience operating under such conditions. Contact our data analytics team for on-demand support managing liquidity and dynamic scenario planning.

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April 7, 2020
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