April 10, 2020
A Guide to Small Businesses Combating the Impact of Coronavirus
There are 5 ducks calmly sitting together in a pond. You shoot one of them, it gets hurt and swims away. Now how many ducks are left in that area of the pond? Your first logical response would be “4” since you only shot one of the five, however the correct answer would be “none”. When you shot at the first duck, the other 4 ducks got scared away and flew off. As a result of COVID-19, our society is embodying this metaphor more than ever in the economic turmoil that it has created.
Although this is common knowledge, note that this current economic climate is not business as usual. 2020 budgets are being shredded, strategic plans are being thrown away, and financial growth is being looked at as an impossible feat. Businesses need to reframe their mindset from that of strategy to that of survival and stability.
An example of this might be Hurricane Katrina, one of the most devastating hurricanes to ever hit the United States. Before the sirens were blaring and the evacuation orders started, most people in the New Orleans region were going about their everyday life. But that plan radically changed when the storms started to roll in. After the initial hurricane hit, there was not one person in the area who was thinking about the next movie they want to see in theaters. They changed their priorities from thinking about what they want to do to what they need to do. This was a rather dramatic change because of how radical the changes in circumstances were.
Here is another example to reframe the perspective. Imagine that you have been training to bike in the Tour de France for the past 6 months. You are practicing every day, monitoring your calorie intake and sleep schedules to make sure that every part of you is ready to go come race day. Now imagine if two months prior to the race, you get into a horrific car accident. You fractured both legs, broke your neck, and doctors have told you that there is potential for you to have full-body paralysis for the rest of your life. After encountering this situation, I can assure you that the last thing on your mind would be your training schedule and dietary regimen. Much like those encountering Hurricane Katrina, you too would experience a change in priorities due to the reality of the circumstance. While you have not completely forgotten the race, there are other *more pressing* issues at the forefront of your mind.
Much like these two examples, in a crisis, businesses must shift their focus from that of a strategic to that of a tactical approach. Close your eyes and put yourself in the shoes of a first responder in the emergency room of a hospital. For each patient that gets wheeled in, you have two strategic objectives: keep the patient alive and stabilize their vitals. Everything else you do in that room is purely tactical. Tactical things include maintaining the heartbeat, keeping oxygen and blood flow, and sustaining normal body temperature. There is one main purpose of all of these actions: to keep the patient alive. In an emergency room, you will not see a muscle to fat measuring device or any other nonessential machines. The reason why is because the emergency room’s focus is on pressing, severe issues that may result in imminent death. The five recurring themes that can be found in an emergency room include focus on the goal, speed of reaction to any changes in vitals, constant communication, monitoring of patient’s vital signs and flexibility to respond to any new crisis that arises. At a time like this, small businesses need to adopt the same mentality as first responders in an emergency room.
Rather than being reactive, each business needs to focus on what it is doing to be proactive. This means that businesses need to shift their focus away from assuming the root of the problem is COVID-19 or what the government is doing to solve the virus. In a world of such uncertainty, the only thing that you can control is yourself. What are you doing to save your business?
According to the CDC, if you have an underlying health condition, it may impact your ability to fight this virus. With that being said, the same is true in terms of your business. If your business is financially unstable or teetering between breaking even and profit before this crisis, it will be even more susceptible to the ailments that the current economy is experiencing. In other words, if you have been playing offense for too long with no defensive plan in place, this may be a very troubling time for your business.
Unfortunately, there is no playbook to navigate what we’re all experiencing because of the ambiguity and scope of the virus’ impacts. However, the best advice we can give is to follow these steps:
1. Understand this to be “the new normal”.
You can only get so far proceeding with “business as normal”, because the fact of the matter is that business is not normal right now. The unfortunate truth is that this may persist for anywhere from three months to six months to the next year. There is much more to come, and no one knows how long this will go on for.
2. Create a strategic plan on managing your expenses while keeping in mind your current cash balances, cash flow, and realistic forecasted revenue.
The objective with this step is to neutralize cash flow as quickly as possible. The main take-away here is that the business’ goals needs to flip from revenue generation to loss mitigation. Avoided losses need to be measured and celebrated as wins in order to track progress. The business also needs to take into account adjustments or realistic cuts to expenses in order to accommodate for any decrease in revenue. When creating a plan, ensure that it is not rigid and can be adjusted as needed to accommodate for changes in revenue forecasted.
3. Be proactive, not reactive.
Even though scientists have created projections and estimates of how long this will go on, no one has a crystal ball. It would be business savvy to think ahead and strategize for potential expense cuts. While some companies can afford to carry a loss on their balance sheet for a period of time, others do not have quite the cash reservoir built up to accommodate for the changes. With this being said, keep in mind your specific situation and try to get ahead of any expense cuts so you are not playing catch up later on.
4. Be frugal.
Keep in mind that the objective here is to minimize expenses quickly. Cut fat, then muscle, and tread very lightly when it comes to cutting any bone (i.e. any expenses that are foundational to the success of the company). There is a difference between being a little thin to then managing a broken bone. Very often, what we think about as the “bones” of our company are a few key employees. The critical question to ask yourself is this: who are the “bones” of your company? In other words, who on your staff is essential to keep the business afloat?
5. Any money borrowed to keep afloat must be repaid out of future earnings.
This concept is something that can be understood by anyone who has purchased an item on a credit card that they could not afford to purchase from their own bank account. They “borrowed” the money because it was available and easy to access, and it felt great because they earned points from their purchase! However, now they’re learning the hard way that borrowing money is impacting their financial future. This is not a judgement on those who have credit card debt and their spending habits, but a realistic reminder that any money you are lent today will come back to bite into your bottom line in the future. Metaphorically speaking, wouldn’t we all like to skip a few meals here and there now rather than eating lavishly for a period of time then getting hit with a huge tab after it all ends?
Communication in any crisis is key. While each business owner is going through their own personal struggle, so is everyone who is impacted by the business. This includes vendors, employees, family members, customers, landlords, etc. Everyone is nervous. While no one has all the answers and they all can’t expect to get a clear-cut response from you on everything, complete transparency to all stakeholders is very important when navigating through a crisis like this.
If you remember nothing else from this article, remember this: in a financial crisis, growth will not bail you out. Future planning based on nothing other than revenue generation will only dig you deeper. The questions you need to ask yourself and your business are these:
How do we survive?
How do we stabilize?
How do we break even?
How can we preserve our cash to make it until the end of this crisis?
How do we make decisions to be smart and frugal today so we can mitigate the impact of our future tomorrow?