In light of recent events related to COVID-19, we have produced the following guidelines to assist in augmenting your business management practices.
Experts are saying that the effects of this situation could extend 3-5 months after the point when normal business activity is able to resume. You will need to be well positioned in this period.
Two main factors to consider are debt servicing and staffing
1) Debt Servicing: Keep borrowing to a minimum in order to reduce the payments due during this period of diminished activity.
2) Staffing: Monitor signs that the economy is in recovery in order to have the needed staff in place when normal activity resumes.
Also, when evaluating the financial position of your business, keep the following in mind.
- Your liabilities should not be more than 20-60% of your assets.
- Your company should have 2-4 months of cash set aside
- No more than 25% of your company’s revenue come from one source, unless you are essentially an employee of that company.
Take on debt as a last resort. During the recovery period, you will be fixing and maintaining existing projects, so the debt incurred will erode current project profitability. If your business becomes over-leveraged at any point, prioritize payments to loans that are personally guaranteed. That way, should you default, you may be able to walk away from the corporate shell and remove the possibility of personal insolvency.
Resist the urge to chase cash instead of analyzing profit margins. When taking on new clients, ensure that your pricing model allows for a suitable profit margin; clients taken on with little consideration of profit margin seldom turn into good clients.
Though most dread the idea of laying people off, maintaining an unprofitable labor force can be dangerous. Your company will have a more difficult path to recovery if you continue to employ people that are completing tasks outside of your main scope of business. Depending on your company culture, pay cuts may be an alternative to layoffs.
Regardless of the path your company chooses, you should implement any changes on a large scale at once instead of gradually or per division; fear of the unknown can negatively impact the culture of your company. Keep in mind that it will be harder to pay people when you don’t have money than it will be to find new people when you’re solvent.
On a positive note, more contractors should be at your disposal as companies start to reduce their labor force.
Be open to remote work. If your business is not currently set up for remote work, this is a good opportunity for a temporary test run, during which you can evaluate your in-place technology and set expectations for employees. It could also help you trim the fat and redundancies out of your business as you begin to see what is needed and what is not needed. Allowing workers to work remotely during this period does not mean that you should feel pressured to transition to a remote setup in the future. Keep in mind that remote work often requires more intentional management, which can be challenging if certain employees require extensive oversight or direction.
Hiring should be on hold at this time unless your business needs to replace employees in key functions. Concentrate on keeping role players together while being more flexible with skill players. Skill players are much more likely to work in a freelance capacity and are potentially more adept at working productively under remote work scenarios. Clients are less likely to notice any disruption that stems from transition of skill players than the replacement of role players.
Keep in mind that you should do what is best for your firm and not one single individual. Clients, employees, and others are looking at you to see how you are reacting to this scenario and evaluating your outlook. Use this time to network with your peers, and to veer on the side of generosity rather than protectiveness.