Responding to COVID-19 has meant that most businesses have had to dig deep. While there will be few outright winners from the crisis, most business leaders will know that they will have to adapt. In this article we explain five basic practices that successful businesses will embrace and six growth drivers that businesses can refine to avoid being left behind.
What does competency look like in a post COVID-19 context?
1 Is your cash management strong enough?
Most businesses will already have knocked out a cash flow forecast to determine their survival plan during the lockdown. It is assumed that most businesses have been able to secure government-backed grants and business interruption loans when necessary, and that they have an integrated cash flow forecast that can be easily updated for forecasts and actual monthly results (but if not, do get in touch). Hopefully you were advised to avoid personal guarantees and not to take on too much debt and borrowing.
Re-forecasting cash flows will need to be done regularly to:
- Continue to adapt to new business patterns and respond to a more volatile working capital management environment (reflecting demand-side, supply-side, forex and liquidity risks). This should support most businesses’ need to challenge working capital management practices harder than ever before although ingrained in-sector thinking about acceptable practices may limit the objectivity to do this effectively.
- Provide scenario analysis to better inform decision making as business improves, bearing in mind that many businesses fail because they scale up business commitments faster than they can convert those assets into cash. Comprehensive cash rationing may be a new business discipline for many, and could run counter to business decision-making approaches to seizing opportunities and managing multiple investment decisions.
- HMRC have become the lender of first resort for many businesses and the payment of ongoing as well as postponed tax liabilities in the context of a downturn in trading will provide a double hit on the cash impact of tax on the business. Balancing your tax risks and opportunities in the context of this more complex relationship with HMRC will be more important than ever. Get in touch if you want to kick the tyres and make an informed decision about your tax affairs.
- Meet ongoing reporting requirements set by banks and investors, given the on-going liquidity risk, which is likely to remain for some time after the lock down ends for reasons noted below.
The responsibility for managing cash typically falls to the finance team and the team’s ability to do this effectively will be determined by the depth of their experience and commercial acumen. We are working to support finance teams through these challenges and to help them learn from our turnaround experience.
2 Will your leadership promote resilience?
Effective communication and ongoing flexibility will be required as employees will be understandably concerned about the impact of the crisis on their employment, absenteeism will be higher due to ongoing infections and staff may be dealing with lockdown related pressures at home. Most businesses will have rushed to furlough and are now faced with a significant downturn in trading and so need to reduce staffing costs. The interaction between corners cut on employer responsibilities going into the furlough period and running a fair redundancy programme may require careful consideration to ensure an effective process is run in keeping with contractual terms and employment law. Staff reductions are difficult but treating people fairly and decently in difficult situations is recognised and appreciated by affected staff as well as unaffected staff. This requires not only meeting employment legislation and accepted practice but also investing in staff communications and leadership behaviours.
3 Do you need an exit plan?
Sadly, not all businesses will survive the lockdown. There will have been some businesses that fell quickly and for others the government’s temporary relaxation of director’s statutory duties for wrongful trading may initially mask the scale of the problem and lull directors into a false sense of security. Being able to identify these situations and deal with the responses on a timely basis is critical if directors are to avoid the business failing and to prevent their personal assets and potentially those of the families being used to repay creditors. There may well be solutions available too, including Company Voluntary Arrangements and pre-pack administration that enable a company’s business to survive. Using such options are incredibly important for entrepreneurs to have a second chance, and a whole generation of scale-ups may need that second chance.
There will be other businesses that can survive the initial challenges but the prospect of rebuilding may seem too daunting, maybe in the context of a pending retirement. While the sale of any business with less than 18 months build-up will undoubtedly risk undermining value creation, many of the principles of maximising value in an exit hold true. There are many brokers and ‘advisors’ who offer snakeoil but the value of using professionally qualified corporate finance advisors cannot be underestimated. Our clients have always valued having experienced and objective support to help them through all aspects of the business preparation and the sale process. Regardless of the challenges we will remain committed to supporting our clients through our ten point plan to optimise exit or succession outcomes.
For others already engaged with an exit plan that has been placed on hold, we recommend they wait for markets to settle. We are working with new clients to create more value, despite difficult conditions.
If you are considering your exit strategy, get in touch.
4 Is uncertainty the new normal?
At the time of writing we won’t know when or how the lockdown will end. The reality could be that the end is not clearly defined, with a rolling series of regional and targeted lockdowns to tackle waves of infection or subsequent scares. In addition, the business environment can be expected to be more volatile, with increased businesses and supply chain fragility.
To address this risk, businesses will need to develop and assess contingency plans. Practically, this will mean:
- Developing risk assessments that consider gross risk and mitigation (this helps prioritise)
- Assessing third party dependencies (should happen as part of any procurement review but this is commonly dropped) and creating the ability to reduce dependenties
- Reviewing how well recent and previous plans worked and refining them (for example, arrangements and HR policies to support remote working)
- Making business process more resilient and in some cases more robust
- Reviewing insurance arrangements in the light of business requirements, market rates and insurer service levels
- Reviewing contracts to introduce or adapt appropriately (for example reviewing force majeure terms)
The challenge with contingency planning is to make it proportionate. Endless and extensive planning is a timewaster, which is why it helps to have an objective perspective to prioritise, draw on other experiences and get to the point. And don’t forget to communicate those plans.
5 Is cash conversion more important than cost reduction?
Most businesses will need to recover profitability and rebuild their balance sheets in the context of additional borrowings and deferred tax payments. Companies that were highly acquisitive before the Coronavirus lockdown and funded that growth through debt are likely to feel very exposed. Since the 2008 banking crisis management teams have frequently been characterised by being risk averse and cost conscious so many will assume cost reduction is a core competency as they batten down the hatches again.
The real opportunities for cost reduction and cash conversion do not lie in individual managers making decisions in isolation but instead focusing on strategic and enterprise-wide cost reduction by using:
- Coordinated and prioritised cost reduction initiatives that will benefit the organisation as a whole by accelerating cash conversion
- Technology as an enabler to identify higher risk payment patterns to and focus on results
- Digitised and simplified working practices and processes to meet key organisational requirements rather than historic expectations
- Structured procurement techniques that are designed to take advantage of not just spot rates in pricing, but strategic procurement decisions that capitalise on market dynamics
- Well established practices for assessing project investment and fixed asset management
The reality is that the most effective form of cost reduction requires clear leadership from the very top of an organisation – simply delegating the cost reduction to the finance team or managers won’t cut through. If you want to draw on our extensive experience in cost reduction to cut through, get in touch.
Are the above the new basics in business that we just have to get on with? With these practices embedded, can businesses find value creation through reassessing the following?
1 Are your values clear enough to persuade consumers to change their behaviour and switch brands?
LinkedIn is full of posts from marcoms practitioners advising it is important to communicate to clients and customers, and full of posts from HR practitioners advising that it is important to communicate to employees, said as if inboxes are not already full of meaningless communications that don’t resonate. Simply put, our view (which is backed by some studies) is that unless your product or service provide a truly unique or compelling utility, people want to feel good about the brands they choose to switch to or work with and challenger brands have always had to work harder on this than established ones. OK, this view might reflect a touch of the triumph of hope over experience but we’re happy to stick to our values and professional standards and be enriched by our partners’ values.
2 Is your strategy effective enough to make a difference?
Developing a winning strategy is not easy and it is more than the communication cascade of the CEO’s personal epiphany. In our experience, strategy should serve to prepare minds and place the business in the best possible position to maximise its chances of success. A winning strategy is most likely to include insight about market dynamics, creativity, collaboration, relevant and measurable outcomes. Owner-manager businesses can be at a significant disadvantage when they develop strategy in isolation. A winning strategy is also going to be reiterative, constantly evolving and creating new insights, solutions and opportunities and in doing so become an effective tool for engagement and a platform for leadership that promotes the constant need to re-examine market relevance. We use a four step plan that draws on years of experience and research capabilities to keep strategic development relevant and dynamic and drive leadership standards.
Apart from the qualitative characteristics of having a strategy, it also serves to prioritise and align resource allocation and support discretionary decision making across an organisation. Launching oddball product lines that marketing don’t have the resources to support or without assessing the impact on working capital management are more likely to be exposed as missteps in a harsher business environment.
3 What is your new digital?
The lockdown has pushed many consumers and businesses into adopting digitally enabled experiences, which might be expected to give solid nudge towards a more digital future especially if many non-digital experiences have been unable to pivot digitally and survive the lockdown. While consumer expectations may have changed, there will be other considerations that may equally affect consumer choices, for example:
- A recognition that pure digital experiences can feel unrewarding – most people still prefer face-to face compared to Zoom-based interactions when possible
- A greater sense of community may encourage consumers to bond closer to the community they most relate to – the local delivery service from a local shop felt good and worked
- A recognition that physical experiences are valued when they celebrate their qualities – great in store experiences are still attractive and persuasive and a luxuriant magazine celebrates a passion better than a website
Equally other considerations could be more important, such as cost and availability and adoption of accepted practices in other territories (for example ‘distributed teams’ using remote working in the US).
Finding your ‘new digital’ will be different for each business category and that ‘new digital’ will continue to evolve over time with technological and behavioural changes. Like retail, the answer may lie in fine tuning a hybrid or omnichannel experience. Experimentation and trial and error can lead to very expensive mistakes and omissions and still fail to identify what consumers want and how to differentiate. Much better to undertake some relevant research – designed to provide insights rather than simply confirm the same-same. Get in touch is you want to go beyond digital myths and trial and error.
4 Are you ready for growth finance?
Access to growth finance can be found through cost reduction, working capital management or partial divestments but for those that don’t already have access to cash, that funding will need to come from smarter debt options (yes, they do exist, even for start ups and SMEs) or equity. The suitability of different funding options will vary enormously from company to company and regardless of the potential sources of investment and the reported ‘wall of cash’ available before this pandemic, access to growth finance is likely to be extremely competitive.
Developing funding options is like other forms of strategic procurement and takes time, it takes research, it requires experience and networks to be able to find the best type of finance for your business. A broker can help with contacts and transaction terms but what most businesses need in the first place is planning to be investor- or lender-ready to get the best terms. Get in touch if you want to understand your options to access growth finance.
5 Is your marketing effective enough?
While it’s true that you cannot grow a business by cutting costs, it is also estimated that less than 20% of ad budgets do any good (Ehrenberg-Bass Institute for Marketing Science). But before you cut those costs – read on. Marketing effectiveness is commonly hampered by performance measurements that track effort rather than effect. In addition, research by The Economist Group notes that too often, marketing is characterised by short-termism, marketing teams lacking the skills to perform the tasks asked of them and that marketing activity is not aligned with the overall strategic priorities of the business. Most of your competitors will cut marketing budgets and this can provide an opportunity especially for brands that don’t follow and double-down on marketing effectiveness, which is likely to outweigh the moderate impact in changes in consumer behaviour. Our diagnostic for assessing marketing efficiency builds on proven principles for measuring successful outcomes. Given that marketing is about maximising the revenue opportunity rather than merely booking sales our tips for marketing in a recession are:
- Focus on effectiveness and measure it to optimise marketing activity
- Lower growth targets but maintain marketing support (relative to your competitors)
- Be extremely wary of price promotion, which will only drive hold sales in the short term
- Be wary of myth, factoids and media myths – focus on analysis and insightful research.
6 Will your acquisitions be more than just closing a deal?
As noted above, there will be many opportunities for acquisitions for companies to achieve additional scale that can be leveraged to improve liquidity, synergies and spread overhead costs. However, as the Harvard Business Review commented: “M&A is a mug’s game, in which typically 70%–90% of acquisitions are abysmal failures”. Their measures were based on the loss in value in several high value transactions but there is an undeniable risk that acquisitions can go wrong. Deal terms, due diligence, financing and Identifying relevant targets are important but the missing ingredient is all too frequently failing to connect the planning rationale, deal execution and post-acquisition value creation.
How we can help: We have the experience to join the dots and help our clients navigate the whole process, including origination, financial modelling and valuation, managing multiple advisors, negotiations, completion and post-acquisition. Get in touch if you want an advisor who will help you go beyond just doing a deal.