Preparing the corporate ship
For most of us, entering another economic recession is nothing new.
We all know that cash flow becomes king, resulting in a balancing act between managing cash requirements against corporate overheads, and businesses take a more prudent view of revenues and the likelihood of increased bad debts.
But while much of this may be familiar, a post-pandemic recession, however, throws in a bunch of new curveballs that make it much more difficult to predict the future.
For those businesses directly impacted by the lockdown, a lot of decisions and considerations will already have been made, including:
- whether to furlough or permanently release staff,
- whether to expect any funding from the government schemes and if so, how much and when it might arrive
- and, most important of all, at what point the business will be able to trade again
These challenges are unprecedented, and every business will continually be reviewing their cash flow assumptions.
For the remainder of us that are fortunate enough to still be trading, whilst many of the tried-and-trusted recessionary reviews and activities remain totally relevant, there remains a unique level of uncertainty that requires a different perspective and probably additional steps to fully prepare.
Perhaps the biggest question is how many businesses will rise from the ashes post-pandemic and, of those that do, how many will survive in the long term?
Historically, economic recessions have been driven by market sentiment. As confidence in growth declines, CFOs start to tighten the purse strings: delaying recruitment, pushing back major expenditure, and removing “unnecessary” spend. When enough CFOs take these steps, the recession is born. It becomes a self-fulfilling prophecy.
Coming out of recession is equally as self-fulfilling. As confidence grows, those same purse strings are loosened, increasing recruitment and spending and the recovery begins.
However, with the current lockdown, not only was the commercial plug pulled overnight, social distancing disrupted everything else simultaneously. No one was prepared for this, no one has any experience of this, and no one (currently) knows when or how this will come to an end.
The optimist in each of us will be hoping that a large proportion of businesses will simply spring back as lockdown measures are removed, but that now seems increasingly unlikely. Social distancing is here for many months to come and many businesses in hospitality, travel, fitness, sport, and others will find it difficult to make ends meet, especially if their business model is based on a high percentage of “occupancy”, whether it is flights or restaurants or even gyms, because they will be forced to limit access.
This brings the recessionary “cascade effect” principle into play. As businesses start their recovery, all of us are expecting some customer attrition. What we cannot accurately plan for is customers who manage to start trading again, but subsequently fail, often due to increasing bad debts and late payments from their customers. As each business failure increases the bad debts of all their suppliers, the vicious circle of the cascade effect fully bites.
It becomes a survival of the fittest environment, invariably led by organizations that have already taken the necessary steps to prepare for the worst and then micromanage their cash flow through the coming months, reflecting what actually takes place.
So what additional steps should every business take in the immediate future to weather this storm? How can they prepare for the post-pandemic recession and survive? What follows is not pleasant reading, but hopefully will provide some food for thought.
The first step is probably the most important. This is not a time for commercial optimism (unless you are very fortunate!) as you are betting the business and the jobs of every employee based on your cash flow, revenue, and bad debt predictions.
How to survive a post-pandemic recession:
Post-pandemic focus #1 – address headcount
The toughest decision is always corporate headcount, as it is almost always the highest business cost. All of us want to keep all of our staff, but a balance must be found where the retained headcount can service the estimated post-pandemic demand levels. Underestimating demand will be reflected in lost revenue opportunities and service levels provided, whilst over-estimating demand will accelerate cash burn and potentially put the entire business at risk.
In the post-pandemic recession, this has become a judgment call as there is really no accurate way to predict what is going to take place.
We have already seen a massive increase in unemployment as businesses cut costs. The only positive for businesses is that this should make it much easier to hire additional resources as demand increases.
Post-pandemic focus #2 – evaluate productivity
The second focus is productivity. How can we achieve the same or more but with fewer resources? Every economic recession increases productivity as businesses make a conscious decision to invest in automation in preference to headcount additions. In a strong market, most businesses focus on revenue growth in preference to very tight cost management, as it is more profitable to invest in making more money than to invest time in saving it.
In a recessionary market, the opposite is usually true: it is much easier to reduce and control costs than it is to generate more sales. As a direct result of the good times past, most businesses have generated a certain amount of resources and spend “fat”, whether by added resources to address growth in volumes in preference to automation or due to lack of focus and other priorities, paying more than they need to on what they already buy.
Post-pandemic focus #3 – conserve cash
Every CFO is now focused on conserving cash in two ways: the first is to stop all unnecessary spend and the second is to go through all their supplier spend to identify where they can reduce short-term costs. In all likelihood, this will remain a top priority for the next 12 – 24 months as a minimum.
The questions every CFO now needs to answer are what additional steps they should take to improve their visibility and control over all spend, and how they can improve and maximize the value they achieve for every £ or $ spent.
The obvious answer is to automate the entire purchasing and accounts payable process as this will provide visibility and control over what is spent, deliver welcome productivity gains for everyone involved across the business, and allow staff to focus on more important work.
What else can you do to survive a recession and prepare for the future?
The above will help to save you cash but why stop there? Digital Invoice Capture also provides granular spend data on every aspect of your corporate purchasing (every supplier, every invoice, and every line item) and, by leveraging spend management expertise (delivered as a service), can identify and deliver substantial savings on everything you already buy. For businesses with a turnover of £10m or more, these savings can be £100k’s per annum.
Given the future uncertainty, now more than ever, investing in the control and management of corporate spend should be near the top of every organization’s priorities as it will lay the foundation for a strategic spend management plan that will positively contribute to both cash flow and profitability in the short, medium and long term.
If you want to save money on what you already buy and achieve complete visibility and control over your accounts payable process both now and in the future, download our eBook below and find out how.