Phrases like ‘the new normal' and ‘new abnormal' have become common in recent weeks. Google Trends data shows these terms spiking in March and April as businesses adapt to uncertain conditions.
Change is a constant and during heightened uncertainty, leaders are expected to balance empathy and compassion with resilience and continuity. Facing these exceptional events, the different tools, systems, processes and strategies an organization relies on are put under the spotlight.
And while not all businesses are affected equally, adaptability is paramount for most. Managing through uncertainty is an artform, based on science. By emphasizing cash flow, receivables, resource planning and inventory, business leaders will be better placed to make informed, critical decisions and tackle operational risks.
Leaders should execute their decision-making using a framework to gather information that will enable the three crucial pillars of visibility, control and agility for their organization. Let's start with visibility
What can I see right now?
Taking stock is critical. With significant decisions to make, you need the right numbers, right now. This includes looking to take advantage of newly announced government initiatives, such as the Job Retention Scheme and Coronavirus Business Interruption Loans Scheme (CBILS) for UK organizations, or for US businesses, applying for federal, state or municipal programmes. Whether seeking these sources of funding, aiming for business continuity, or rethinking go-to-market strategies, steps need to be taken to ensure visibility into key numbers:
- Update your balance sheet to determine your total assets. This should account for bank reserves, accounts receivable claims for payment for goods supplied to debtors and unbilled receivables, with a particular emphasis on available cash.
- Determine liabilities (accounts payable, credit and other) with an eye to which payments may be strategically deferred. This is critically important for organizations that may have planned to delay payments such as tax or rent, resulting in significant liabilities being due at unusual times, such as to align with financial reporting periods.
- Determine short-term cash requirements for operational expenditures such as payroll and for crucial business continuity expenses.
- Evaluate receivables risk in light of current business conditions with the expectation that days sales outstanding (DSO) will increase, and bad debt write-offs may be forced to increase, as customers' revenue streams become strained.
- Use these financial data points to run forecasting exercises based on the most-likely scenarios, to quantify the impact to your profit and loss (P&L) statement, cash flow and balance sheet and align them to likely short, medium and longer-term disruptions. Use trusted third-party insights to gather forecasting trends. Industry bodies, including in the UK the British Chambers of Commerce and the Confederation of British Industry, have created dedicated resource hubs to help organizations anticipate industry disruption.
With accurate, up-to-date financial data and ‘what if' scenarios to hand, you can determine where you stand and reliably inform your next steps. By knowing what you can seeright now, you can plan for business continuity and provide a platform to work flexibly with suppliers, landlords, lenders, tax authorities and insurers for the health of your businesses if necessary.
What can I control now?
With visibility comes the opportunity to accurately apply controlling measures. Ultimately, these measures need to apply to three foundational areas — process, performance and people.
Most businesses operate on 12-month budget cycles aligned to the calendar or financial year, planning for strategic improvements with longer timeframes. During uncertainty, this focus needs to shift to immediate priorities that help maintain liquidity:
- Re-focus to a 30- to 45-day window to plan immediate actions and develop contingencies based on informed assumptions and guidance from industry bodies. Run scenario-based planning exercises based on ‘what if' scenarios, such as whether external funding may be needed if conditions become more challenging.
- Question whether changes can be made to improve your short-term position. For example, review budgets to ensure you aren't funding longer-term projects that are likely to be delayed or cancelled. Aim to unlock pockets of budget that can be reallocated — such as reserves that have been set aside for travel and accommodation, recruitment or physical events. Start to work out payment terms with suppliers and other accounts payable to maximize cash availability.
- Put in place stringent financial controls around cash-related functions and reconciliation, such as approval processes for any expenditures and setting alerts for late payments, so that necessary actions can be taken proactively to work with customers who have payment difficulties.
Near real-time monitoring of key KPIs is crucial during uncertainty, helping leaders spot and adjust while there is time:
- Measure the time it takes to close your books in days, not weeks or months, and work towards the finance team delivering a P&L statement, balance sheet and other analyses so that you can understand your current cash more frequently.
- During periods of growth, some level of inefficiency is tolerable, but during uncertainty, explore options to reduce non-essential administrative costs as a percentage of current revenue.
Uncertainty can have a destabilizing effect, contributing to reduced productivity, and potentially, staff turnover. By having clear visibility into operations, leaders are better placed to transparently engage with team members:
- Industry bodies such as the UK's Recruitment & Employment Confederation and Chartered Institute of Personnel and Development have developed a comprehensive set of resources to assist and advise organizations on managing potential changes to the workforce. Use these tools if you are considering offering unpaid leave, reducing hours or furloughs.
- Determine what support options are available and ensure you're compliant and eligible for initiatives such as the Job Retention Scheme before communicating proposed changes.
How can I be agile to change?
When leaders have a handle on short-term issues, they must prepare the business to operate in an evolved manner that is suitable for new environments. Although capital may be in short supply for many, business leaders should carefully time investments and resources with an eye towards recovery and positioning themselves to succeed in the longer term:
- Crowd-source ideas from staff to use their intricate knowledge of your customers and business to determine possible revenue streams and align training and delivery of new skills that may help to bridge the knowledge gap to make these opportunities a reality.
- Explore new ways to combine products and services as well as how to enhance them, such as by adding premium levels or even changing to an as-a-service model that may appeal to customers with cash flow challenges. Use quiet periods and organize taskforces to analyze what new or underserved markets your products or services may appeal to and look to tackle the inefficiencies that may prevent plans becoming a reality.
- Talk to your senior executives about technical or process advances. This might include cancelling capital-intensive technology purchases in favor of as-a-service options that deliver more flexibility.
Leaders who can take a deep breath and creatively focus their best and brightest resources on reimagining products and services will be positioned to operate in the long term. Switching the way products and services are delivered during ‘normal' condition is challenging, but a slowdown may offer opportunity to properly explore new ideas.
Uncertainty will impact operations in the long term and create a new playing field. Keeping a tight control on cash flow and the balance sheet now — and centering around visibility, control and agility — will put leaders in the best possible position to make smarter decisions with confidence.
Read more about these three themes of visibility, control and agility in Oracle NetSuite's whitepaper, Managing Business Uncertainty