Rightsizing your business in 2021
COVID-19 has transformed the business landscape and a new environment calls for a new approach. As businesses face challenges of changed customer behaviours and impact of a technology revolution caused by the pandemic, now is the time to consider, “What’s your next move?”
The reality for many business owners is that as the economy reopens, they will find their business revenues have shrunk and they need to achieve a leaner cost base or switch up their business model in some way to remain viable. Now is a good time to carry out a strategic review.
1. Cash flow analysis
As a starting exercise, each business owner should review their weekly business cash flow from the last two years. This will form the template to forecast the next 12 months using pre-COVID-19 and COVID-19 impacted periods as yardsticks. By analysing their top customers, segments etc., business owners will identify possible growth opportunities and where potential gaps might exist which can then be factored into projections.
By categorising costs on a product, payroll, variable and fixed overhead basis, businesses will quickly see periods of inefficiency and be able to identify times where resources need to be trimmed or put to greater use.
This will help pinpoint the key risk factors for the business that impact cash flow, i.e. business not returning to pre-COVID-19 levels, loss of certain customers, dependency on certain staff for key customers and any other “what if” scenarios on the cash flow.
Tip: Use the cash flow analysis to look at the next 12 weeks of sales and set targets with your sales teams to beat the same period from 2019. Report back on a week-by-week basis with the team to set a cultural requirement for the need to recover to pre-pandemic levels.
2. Overhead analysis
Most businesses with a determined focus can trim overheads by over 5%, just by considering alternative suppliers for items used by the business.
Tip: What is often forgotten is the simple task of asking staff for ideas as to where savings can be made in the business and rewarding the best ones.
3. Product margin analysis and stock-holding days
The 80:20 rule that applies to many businesses is where the top 20% selling items or customers generate 80% of the profit. Business owners should establish these rankings by profitability and prioritise adding larger, growing product lines or customers.
The working capital cost across customers should be examined, as customers taking extended credit can bite into the margin.
Tip: Establish if there are customers with low growth potential which are unprofitable and/or poor payers and perhaps explore the need for price increases if service is to be continued as before. This may free up resources for more profitable customers to be won if they move elsewhere or increase profitability if they remain as customers.
4. Currency impact / hedging
The impact of the pandemic has taken focus away from the challenge that Brexit poses for businesses that trade with the UK. The closeness of trade with the UK means many businesses will be buying or selling in sterling. The potential for sudden 5-10% swings in the exchange rate requires businesses to de-risk by hedging their needs.
Tip: Many products that are imported from the UK are manufactured elsewhere, with the traditional supplier having a UK base which can be bypassed by setting up different supply channels or sourcing alternative products.
5. Repayment of COVID-19-related liabilities
This working capital impact will be exacerbated by the unwinding of government supports where warehoused taxes need be repaid at the same time as current taxes and other accumulated debts need resolving. This will impact cash flow as the additional legacy bills are cleared down.
Tip: Engage early with Revenue, landlords and other creditors where arrears have been accumulated. Seek to put in place repayment plans over three years rather than shorter terms which could cause solvency problems for the business. Perhaps avail of the COVID-19 loan guarantee scheme to repay these liabilities and secure a low-cost bank loan with certainty on repayment commitments and timings.
6. Staff efficiency / redundancy
The downturn caused by COVID-19 will force firms to tighten up their cost base. Now is the time to see if positions can be amalgamated, processes streamlined and hours reduced to establish if a redundancy program should be implemented.
Tip: There is financial assistance available from the Department of Social Protection for companies who cannot afford to pay the statutory redundancy cost.
7. Joint ventures / mergers
Once a year it is always useful for a business owner to consider what works best in terms of enhancing business value. Should they continue with organic growth or look at alternative strategies? This could be seeking out or being a target for acquisition, considering some form of strategic alignment, or bringing management to ownership.
Tip: There are tax efficiencies in terms of low net effective capital gains tax treatment for business exits using retirement relief and entrepreneurial relief. Looking ahead, a tax plan around exit should be put in place in good time.
The reality for many business owners is that as the economy reopens, they will find their business revenues have shrunk and they need to achieve a leaner cost base or switch up their business model in some way to remain viable. Now is a good time to carry out a strategic review.
Seven key areas for a business to review
The key decisions to be made can be clarified by undertaking a simple business diagnostic under the following seven headings.1. Cash flow analysis
As a starting exercise, each business owner should review their weekly business cash flow from the last two years. This will form the template to forecast the next 12 months using pre-COVID-19 and COVID-19 impacted periods as yardsticks. By analysing their top customers, segments etc., business owners will identify possible growth opportunities and where potential gaps might exist which can then be factored into projections.
By categorising costs on a product, payroll, variable and fixed overhead basis, businesses will quickly see periods of inefficiency and be able to identify times where resources need to be trimmed or put to greater use.
This will help pinpoint the key risk factors for the business that impact cash flow, i.e. business not returning to pre-COVID-19 levels, loss of certain customers, dependency on certain staff for key customers and any other “what if” scenarios on the cash flow.
Tip: Use the cash flow analysis to look at the next 12 weeks of sales and set targets with your sales teams to beat the same period from 2019. Report back on a week-by-week basis with the team to set a cultural requirement for the need to recover to pre-pandemic levels.
2. Overhead analysis
Most businesses with a determined focus can trim overheads by over 5%, just by considering alternative suppliers for items used by the business.
Tip: What is often forgotten is the simple task of asking staff for ideas as to where savings can be made in the business and rewarding the best ones.
3. Product margin analysis and stock-holding days
The 80:20 rule that applies to many businesses is where the top 20% selling items or customers generate 80% of the profit. Business owners should establish these rankings by profitability and prioritise adding larger, growing product lines or customers.
The working capital cost across customers should be examined, as customers taking extended credit can bite into the margin.
Tip: Establish if there are customers with low growth potential which are unprofitable and/or poor payers and perhaps explore the need for price increases if service is to be continued as before. This may free up resources for more profitable customers to be won if they move elsewhere or increase profitability if they remain as customers.
4. Currency impact / hedging
The impact of the pandemic has taken focus away from the challenge that Brexit poses for businesses that trade with the UK. The closeness of trade with the UK means many businesses will be buying or selling in sterling. The potential for sudden 5-10% swings in the exchange rate requires businesses to de-risk by hedging their needs.
Tip: Many products that are imported from the UK are manufactured elsewhere, with the traditional supplier having a UK base which can be bypassed by setting up different supply channels or sourcing alternative products.
5. Repayment of COVID-19-related liabilities
This working capital impact will be exacerbated by the unwinding of government supports where warehoused taxes need be repaid at the same time as current taxes and other accumulated debts need resolving. This will impact cash flow as the additional legacy bills are cleared down.
Tip: Engage early with Revenue, landlords and other creditors where arrears have been accumulated. Seek to put in place repayment plans over three years rather than shorter terms which could cause solvency problems for the business. Perhaps avail of the COVID-19 loan guarantee scheme to repay these liabilities and secure a low-cost bank loan with certainty on repayment commitments and timings.
6. Staff efficiency / redundancy
The downturn caused by COVID-19 will force firms to tighten up their cost base. Now is the time to see if positions can be amalgamated, processes streamlined and hours reduced to establish if a redundancy program should be implemented.
Tip: There is financial assistance available from the Department of Social Protection for companies who cannot afford to pay the statutory redundancy cost.
7. Joint ventures / mergers
Once a year it is always useful for a business owner to consider what works best in terms of enhancing business value. Should they continue with organic growth or look at alternative strategies? This could be seeking out or being a target for acquisition, considering some form of strategic alignment, or bringing management to ownership.
Tip: There are tax efficiencies in terms of low net effective capital gains tax treatment for business exits using retirement relief and entrepreneurial relief. Looking ahead, a tax plan around exit should be put in place in good time.
Conclusion
Whatever direction the economic recovery takes, having a lean and agile operation will keep businesses on the best track for success. We recommend you keep challenging yourself to figure out what the new normal will bring and perhaps reflect for your business on the following seven strategic questions.
- How will life change for your customers?
- What will happen to your current competition?
- What specific thing will set you apart in the new market?
- Where will you get new talent?
- What will your supply chain look like?
- What specific things will you need to stop doing or let go of?
- What are your new monthly forecasts and key milestones?
Aiden Murphy is a partner in Crowe practicing in the areas of corporate finance, rescue and restructuring. If you would like assistance with any of the above measures, contact Aiden or a member of our corporate insolvency and restructuring team.
What's your next move?
A new environment calls for a new approach. Make your next move count.
