The pace of change at the end of 2019 was ever increasing. But few could argue that the speed at which change was forced upon the entire world over the past 4 months has been nothing short of unimaginable. If predicting pandemics is something only the likes of Bill Gates can do, how could even the sharpest of CFOs have had any chance to ‘forecast’ this sort of economic shutdown.
What airline CFO would have dreamed that almost every plane in their fleet would be grounded, not able to generate revenue. How does someone park that much cash away in a ‘pandemic fund’ to be able to survive. For businesses with their wings clipped, but not in the magnitude of airlines, what could or should they have done to protect against this. What will they teach at university in the years to come as they consider why some companies failed and some survived.
Without downplaying the decimating impacts of Covid-19, the answer is quite simple. It is getting the basics right. Whilst we may never see a pandemic like this again in our lifetime, it is this writer’s opinion that ‘business as usual’, according to the finance team, will be very different moving forward.
Certainly for the astute readers they will know that cash is king. Every business is different but the core underlying metrics that apply to every business always comes back to liquidity.
And so, messaging to the rest of the business in what will be ‘the new normal’ could look something like this:
To protect, as best we can, against something like this happening again, we will be building a pandemic fund. We will do this by shaving a % off all spending budgets for the next few years. Our focus will be on generating at least the same revenue with slightly less investment and if we achieve this, we can re-invest some of the profits into increased spending budgets. Please submit your revised budgets for review by 30 June. Kind regards, your very stressed out Finance Team
Of course, this may, indeed, it probably will, be met with fierce competition with arguments centered around capturing an opportunity in a recovering economy. But now more than ever, the focus must be on the basics of fiscal responsibility. No doubt it is going to be a balancing act.
But isn’t this just the basics you say. Wouldn’t all businesses be operating this way? Well, the impacts of the pandemic on businesses have proved many are not.
There are always outliers in this discussion, like startups who knowingly spend more than they earn until cash flow breakeven is achieved, but they more than any other business have to understand their cash flow runway. Hence why many businesses may have reverted to the ‘start up’ approach during this pandemic.
And so, a non-exhaustive list of basics to consider is:
- Cash is king, so what is your runway if you saw a drop in revenue of 50% either overnight or gradually over 6 months. Could you survive for 6-12 months without major cost changes? If not, what changes will you make to protect cash
- In normal operating conditions what cash flow metrics & indicators are you tracking and what happens when one falls below target? How do you recover lost cash flow?
- Are your systems & tech up to scratch to find cash flow issues quickly so they can be addressed?
- What is driving decisions in the business? Gut, historical data, forward forecasts, or something else. There is a place for taking risks, but even these risks are supported by numbers.
- Are your pricing models properly incorporating all costs, or is it conveniently forgetting your sunk, opex and other costs? Is this approach sustainable?
- Is your finance team humanising the numbers? Most divisions outside of finance tune out when metrics appear in a busy spreadsheet. What is your finance team doing to translate the numbers into a language every division can understand?
If you can’t answer these questions, or if you know the answer and it is not what it should be, then now is the time to use the pandemic as a catalyst for change to get the basics in order.