Understanding the Financial Levers in Your Business
None of us had in our 2020 Budget/Forecast the headline: execute the COVID-19 plan. However, we are all facing this new reality and the challenges it presents in executing on those items that actually did headline our 2020 Budget/Forecast.
For me, what this all boils down to as a finance professional, are knowing what are those levers and dials that you can turn on or off during times of exceptional growth that are wildly exceeding expectations vs those times of being thrown a complete curveball and the business is a downward spiral. The majority of time businesses are usually somewhere in the middle of these two extremes. Here in 2020, a lot of companies are facing the latter and are looking to stabilize their operations. Here are a few tips that will apply to most business operations and should always be at the ready for execution.
Identify Fixed vs Variable Costs
Fixed Costs are those that are tied into an agreement that are non-cancelable until the agreement’s term is up or may require the payment of an exit fee to terminate. Variable costs are those that are completely discretionary to the buyer. They can be items where only a notice to a vendor is required to exit or they are items you pay for on “as needed” basis. In times of crisis, where quick maneuvering is needed, focus on the variable costs that in the short term (company defined) that will not have a long term impact on your customers or clients. Variable costs changes can generally be executed on quickly with minimal cost or disruption. As an on-going practice, work with all your departments to determine these variable costs and their ranking within an individual department and ultimately within the overall organization.
Payroll is often a company’s largest expense, and it’s an unfortunate reality that are forced to make reductions in force when times get tough. However, even here, companies can look to be creative. Companies can reduce employee hours or limit the work week to 3 or 4 days a week for some individuals or departments. Remote work has the hidden benefit reducing overhead costs for an office. There can be savings in the short term on utilities and cleaning and longer term with the reduction of the office footprint (office leases, furniture, etc.). Though not ideal, reducing pay is also an option and at the end of the day is better than unemployment.
Eliminate non-essential spending and seek cheaper options
The company should look across the board at the use of business consultants, temporary labor, advisors, etc. These relationships are usually scrutinized closely when they are initial setup, but don’t get the same on-going scrutiny, let’s say that the sales budget gets every year. How essential are these costs in reality or we just haven’t taken the time to really look at them in awhile? Is it just time to renegotiate terms period? As you look at options, make software top of mind. There are so many options around cloud computing or productivity tools that exist now. You may be able to save money by taking some aspect of your business to the cloud or you may find that you can invest in a piece of software vs fretting about the new headcount requisition that you just lost.
Hopefully, this list is thought provoking and gets you further down the road of creating your own program to understand the financial levers in your business. As with all financial decisions, they can’t be taken in vacuum. They should be weighed against the strategic initiatives of the company and carried through into a financial model so that you can measure your plan against the outcomes to come in the coming weeks and months.