#2 Making it through the crisis – Covid-19

Corona Action Plan for Businesses

There are moments in life in which “wait-and-see” works, however, now is not one of them! Even though the first shock of this crisis has passed for most, you and your team could still get infected anytime, a complete shutdown of your business is possible and your company could get into severe financial distress (among other possible scenarios). Based on the experience of working with multiple companies in the past few weeks and valuable insights of (Venture Capital) investors that have seen companies going through different crises, we can conclude that a proactive approach is the right way to go to avoid major damages.

Step 1: Analyse Impacts on Your Business

In order to make it easier to assess the impact of this crisis on your company and derive actions from it, I recommend splitting the analysis into subsections. Some of those might be impacted more, however it is important to review all of them to make sure that you don’t forget anything. Keep in mind that this should be an analysis that you review and adjust frequently: Given the dynamic changes we have seen in the past few weeks, I recommend reviewing the following points on a weekly basis.

1. Operations & Team: The goal is to stabilise your operations and team – over and over again!

  • Comply with the most recent regulations of your local authority – no exceptions!
  • Anticipate next steps and draw from experience from other companies/ regions!
  • Plan and if necessary, execute organizational adaptations (e.g. working in shifts). Try to cover each function in your business with more than one person.
  • Create work-from-home protocol and provide resources your team needs to be productive. Introduce virtual meetings instead of face-to-face. Explore which online tools your team prefers for calls and messaging.
  • Communicate with your team more frequently and transparently. A daily team call is a good idea! 
  • Be mindful of your team members’ situation – they may be struggling!

2. Supply: Looking at the whole value chain … 

  • Which suppliers are affected by the crisis and how? Are delivery times and/ or payment terms affected?
  • Reach out to your suppliers and keep communications up – at least regular email exchange.
  • If you haven’t done so, work on a detailed inventory to estimate your inventory runway.
  • Identify alternative suppliers.

3. Revenue & Clients: Take a customer centric view to defend your revenues against declines.

  • Which clients/ sales channels will be affected by the crisis and how? 
  • How are your changes in operations and/ or supply affecting your sales?
  • Shift all sales and marketing costs to optimize your demand by focusing on most relevant clients.
  • Increase communications with clients: Let them know about any changes and how you are operating.
  • Develop strategies to mitigate the downside risk including 
    • An updated pricing strategy (potentially segmented)
    • Leveraging your sales pipeline and focus on most promising leads
    • Accelerate new sales opportunities to diversify revenue streams
  • Think outside the box and be part of the solution: How can you adapt to meet people’s current demands?

4. Expenses: How can you optimise your expenses to not get into red numbers without “cutting the muscle”?

  • Identify and cancel operationally-non-critical expenses such as trainings, travel and/ or consulting projects.
  • Review and freeze hiring plans.
  • Reach out to your landlord and discuss a potential reduction/ deferral of the rent.
  • Optimize sales and marketing expenses.
  • Postpone planned investments.
  • If absolutely necessary, review current payroll and consider cutting salaries. Letting go of employees (if possible), closing offices/ stores/ routes.

5. Cash & Funding: This brings it all together as you are doing all of the above to avoid that your business is running out of cash.

  • Frequently review cash balances and use cash forecasts (see Step 2)! 
  • Review Accounts Receivables and other current assets: How much money are you planning to collect and when? Is there any “trapped cash” that you can collect? Is there a possibility that you cannot collect this money?
  • Review current Accounts Payables: How much is due and when do you have to pay it? Optimize cash outflow by checking with suppliers on potentially extending payment periods.
  • Review all other short- and long-term liabilities: Reach out to lenders and discuss your current situation. Ask about possibilities to defer interest and/ or principal payments.
  • Update your funding pipeline and assess the likelihood of obtaining financing (if needed) – see section 3 for more info!

Step 2: Model Your Exposure – Stress P&L and Runway Estimation 

If you know me, you won’t be surprised by this at all. In my work with both pipeline and portfolio companies, I spend a lot of time reviewing and updating financial models. While financial modelling might seem like a time consuming way of projecting something that will not come true anyways, if used right, they really are a powerful tool for financial/ cash planning and decision-making.

Financial model: Excel spreadsheet that includes a projected P&L, Balance Sheet and Cash Flow Statement for (ideally) +5 years. Ideally also includes historical data as a starting point. All projections should be assumption-based. The assumptions are used to calculate all business activities including revenues, costs, CAPEX, funding, etc. Ideally, calculations are made on a monthly basis. The runway of a company can be estimated based on the cash balance (to be included in the balance sheet): As long as the projected end balance of a respective month is positive, the company is not running out of cash:

  • Beginning Balance = Current cash balance from bank statement
  • Plus all cash inflows: Revenue, cash collection from accounts receivable, new funding
  • Minus all cash outflows: Costs of Goods Sold, overhead expenses, interest and tax payments, outstanding payments to suppliers (accounts payable), cash spent to increase your inventory, loan principal payments and dividends
  • Ending Balance = Beginning Balance + all cash inflows – all cash outflows

Especially in times of crisis, it is extremely important to stay on top of your company’s cash planning. The last thing you want is to run out of cash! Therefore, make sure you review your assumptions, with special emphasis on the next 12-18 months. Playing with these numbers will help you get a sense for the impact of possible changes on your available cash. The information from Step 1 is critical as you should include it into the financial projections.

A couple of important thoughts:

  • Revenue streams: Make sure you identify and separate different revenue streams: Different prices, COGS, and clients’ behaviour for different business lines, sales channels or products. While some may be hit extremely hard in these times, others may do ok or even grow (for example online sales or groceries).
  • Assumptions: In order to make it easy to make changes to your financial projections, calculate all numbers based on assumptions. Ideally, you can include 2-3 scenarios of assumptions (“best case”, “base case” and “downside case”).
  • Stress your P&L (“downside cases”): Run numbers based on extreme revenue cuts: 30% – 50% – 90% lower sales for 3-6 months at given overhead expenses.
    • What does this do to your company’s expected cash balance?
    • Under which circumstances could this be realistic? Include thoughts into your “base case”
  • Compare your results and draw conclusions from different cases: Your “best case” may not look too bad and you have plenty of runway until you would reach your cash limit, but how likely is this scenario compared to the “downside cases”?
    • Find middle ground in the “base case”.
    • Make sure you write down your argumentation and logic. In case the situation changes, you can review these points and make changes accordingly.
  • Don’t forget about the opportunities. Any recession leads to growth once it passes. Which opportunities do you see in the long-run?

Based on this analysis you are considering to start fundraising or you are already in the process of it? Continue to the next page to learn more about Fundraising in Times of Corona!

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