No one was prepared for the devastating impacts of the COVID-19 pandemic. Thankfully, the U.S. government acted to provide businesses and individual workers with a much-needed lifeline. Economic stimulus programs such as the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the Heroes Act, the American Rescue Plan Act, along with other actions and programs, kept many businesses afloat and provided household income to furloughed and terminated employees.
As the stimulus programs come to an end and companies begin their return to normalcy, what’s next? There’s an old saying that many of us heard during the pandemic and continue to hear now: Never let a good crisis go to waste. Savvy business owners should take this statement to heart.
There are major lessons to be learned from the COVID-19 crisis. Businesses needed to come to terms with how COVID-19 changed their operations — perhaps forever. In the aftermath of COVID-19, what should owners and operators do to not only adjust and compensate but to strengthen their businesses while also preparing and being flexible for any future slowdown or shutdown?
Here are a few ideas.
Imagine that, before COVID-19 hit, you were a thriving restaurant operator with four locations and $100 million in annual revenue. Your operation was primarily dine-in and you offered take-out but earned a fraction of your revenue from it. The Paycheck Protection Program (PPP) helped you keep the lights on during the pandemic and keep staff on payroll. Like other restaurants in survival mode during the pandemic, you had to move exclusively to a take-out model.
So, now your state is allowing you to operate at full or near-full capacity, and you are expecting a return to normal. This would include reverting to the pre-COVID dine-in business model, cost structure, seating capacity, employee headcount, inventory, and anticipated revenue. While this could be the right move, this could also be a big mistake.
Businesses need to come to terms with the possibility that permitting full capacity does not guarantee full demand. As lockdown restrictions lift, CFOs first need to determine, based on current indicators, what demand will be, how much and for what offerings, and resize operations to account for the fact that they may be operating a different size or different model business post-COVID. Importantly, companies need to optimize their cost structures to account for current and near-term demand, not 2019 demand.
Some ways that companies can align their cost structures with current demand include:
The pandemic unquestionably changed buying and consumption habits. For example, customers may now be more inclined to continue stocking up on “necessities,” as they did during the pandemic, and reduce or eliminate purchases of goods and services they deem nonessential.
According to Business Insider, products like spiral hams, baking yeast, pet products, and popcorn were flying off the shelves during the pandemic. And we all remember how toilet paper became a hard-to-come-by commodity due to hoarding. Conversely, the Hershey Company reported a 40% to 50% sales decline for its gum and mint products during the pandemic, due to consumers wearing masks and making fewer convenience store visits.
The question is, will shopping and consumption habits revert to what they were pre-pandemic? The answer is, probably not. For example, with movie production companies offering consumers in-home streaming of first-run movies during the pandemic, will people be clamoring to go back to the theaters? Nobody knows. But, at least for the near term, it is unlikely that behavior required during the pandemic will immediately (if ever) be abandoned in favor of pre-pandemic patterns of living.
Businesses need to take a close look at their products and services pre-, during, and post-pandemic. How did sales of various products or services change over this time? What, out of necessity, was the business compelled to do during the pandemic that might have improved the overall customer experience?
Many businesses will find that their value proposition has changed. Looking at the restaurant operator example we cited earlier, the pre-COVID-19 value proposition may have been “great food and great atmosphere.” Post-COVID-19, since the restaurant ramped up its take-out capabilities out of necessity, that value proposition could now be “great food and great convenience.” Given this, it may be wiser for that operator to invest in fewer candles and cloth napkins and more in delivery trucks and to-go containers.
Many companies that faltered or failed during the pandemic were already unstable. Now is the perfect time to conduct an internal assessment with the results incorporated into a go-forward program that focuses on lowering risk and increasing stability.
We recommend an in-depth financial analysis to reduce balance sheet liabilities, improve P&L bottom line, and maximize free cash flow. This would include an examination of the risk factors connected to each item of each statement with appropriate mitigation steps put in place.
One of these steps may be reducing inventories, which must be accompanied by tightening or perhaps completely revamping purchasing policies. For example, a business that, pre-COVID-19, had operated with a pipeline of two months of product may want to consider committing to just one month now, allowing it to see how sales and revenue growth progress. Although supply continues to be a challenge for some industries, it remains true for most that it’s financially safer to have to scale up inventory than it is to have to lower it.
Other areas to explore in a risk mitigation initiative are the company’s IT infrastructure and cybersecurity protocols. We are already seeing major breaches for companies that supply critical necessities such as energy and food. Now is an ideal time for businesses to conduct an IT infrastructure vulnerability assessment and make remedial changes as they gear up for growth.
However, IT investment is not only needed for protection. Technology also became the backbone that connected people, products, and services during COVID-19. If technology systems are not all they could be, one way to stabilize and prepare for the future is to first shore up basic IT requirements for remote work and remote access. Then, figure out — as Amazon did in the 1990s and is now reaping the benefits two decades later — how to leverage technology to transform the business.
Finally, we are already seeing post-COVID-19 product shortages for everything from lumber to washing machines along with rising prices for food and everyday staples. Businesses, including retailers and manufacturing facilities, should be actively looking for alternative suppliers diversified by geography to guard against shortages brought on by unanticipated market factors.
While traditionally there are fewer variables to consider in the U.S. supply chain versus overseas, now might be the time to explore alternatives to current international supplier options. The terms to take note of for the supply chain are off-shoring, near-shoring, and on-shoring. Which of these, or which combination of these, is right for your business post-COVID?
We think protective levels of cash cushion will be critical over the next year. While the COVID-19 health crisis seems to be ending here in the U.S. thanks to the success of the vaccination programs, several factors suggest caution.
First, the pandemic is nowhere close to over in certain parts of the world, India being the most heartbreaking example. The longer the virus rages uncontrolled anywhere in the world, the more chances there are for vaccine-resistant mutations to occur which would necessitate a new round of restrictions in first-world countries.
Second, suppliers are struggling to restart and meet growing demand. While demand may be returning or perhaps even exceeding pre-pandemic levels, that means nothing if there is no supply to meet it. Thus, raw material costs in some industries as noted above are rising quickly. While this is a problem operationally, it is also a problem in terms of inflation and the macroeconomy.
Third, many businesses survived this year because the CARES Act did what it was supposed to do: It provided short-term liquidity to prop up businesses when their operating metrics were otherwise upside down. However, demand has not fully returned and the stimulus money is approaching an end. Can businesses throughout the supply chain survive without support? If not, what does that mean for the economy?
In addition to liquidity, the CARES Act provided for other subtler forms of support that are also ending and which may, when all is said and done, prove to be the most cautionary note in this article.
Most importantly, regulators loosened standards for lenders with troubled borrowers. This has created almost unprecedented lender leniency. What happens when the regulators return to normal standards and lenders tighten borrower requirements? We think there are many businesses that won’t pass muster and, from that, a cascade of distress will likely ensue.
But, in addition, the Small Business Reorganization Act of 2019 was enacted just before the pandemic making it easier, less expensive, and more favorable for businesses with less than $2.725M in debt to take advantage of the protections afforded to larger companies by the bankruptcy code. The CARES Act raised the debt threshold for qualifying to $7.5M.
This created a more level playing field between distressed companies and their creditors for many more businesses who fell into the small and mid-size category. The result was an increased willingness of creditors to work collaboratively with their customers to help them survive. It is possible that, come 2022, the debt threshold will be lowered to pre-pandemic levels, removing a tool for many businesses to combat distress and reorganize successfully.
And, finally, rising costs and the threat of inflation are leading many to speculate that the historically low interest rates will begin to rise and add to financial pressure for everyone but especially those who are over-levered.
As noted at the start of this section, cautionary bells still ring quite loudly. So, what should you do in light of that? Shore up cash through all means. We discussed how to improve operating cash flow above. But, now is an excellent time to re-analyze cash and capital requirements for stability and growth.
While capital generated from efficient operations is ideal, working capital and expansion capital are often necessary for getting a business up to its flying speed. Whether the business is simply looking to normalize its operations or seeking expansion opportunities post-pandemic, a capital markets transaction may be an ideal approach. Traditional financial sponsors such as private equity firms have been sitting on dry powder for years, and since the middle of 2020, deal-making activity has ramped up considerably. It is presently a very frothy, very busy seller’s market. Take advantage of the timing to divest what is non-core but valuable to someone else. Look for good deals, usually with some hair on them, where the seller’s need to transact drives a more reasonable purchase price.
While banks still may be a bit wary about lending to businesses in certain industries seeking growth capital, there are numerous alternative financing sources, including private debt funds, that can provide needed capital. Looking back one year, the primary cause of distress was a lack of revenue driven by government-mandated shutdowns and capacity restrictions.
Now, as businesses reopen, customers are coming back in droves but other stress points are showing themselves: labor shortages, rising costs for products and supplies, and a level of continued uncertainty. These stress points make it even more imperative that businesses have access to necessary and flexible capital sources.
We all hope the world will never see the likes of a global crisis, such as the COVID-19 pandemic, again and that it is truly almost over. But game-changing events, hopefully of lesser magnitude, are bound to happen and, as with natural selection in the wild, shifting environmental conditions drive evolution and forward progress. Businesses that best prepare themselves to adapt to the unexpected come out stronger in the end. Those that learn by “never letting a good crisis go to waste” become the next leaders in their industries.
Kevin Clancy and Cynthia Romano are global directors of restructuring and dispute resolution services at CohnReznick LLP.