The COVID-19 pandemic has had a profound financial impact on nearly every industry in the global economy.
Restaurants and food service companies, in particular, have been deeply affected by stay-at-home and quarantine orders. Research from the US-based National Restaurant Association found that US restaurants alone lost an estimated $120 billion in sales from March through May. The restaurant industry lost more in sales and employees than any other US industry, and 75% of restaurants surveyed do not expect to be profitable this year without government help, according to the National Restaurant Association.
Kathy Lockhart, CPA, CGMA, is dealing with that devastation every day. In her role as controller and vice-president of Noodles & Company, a publicly traded Colorado-based fast casual restaurant chain, she’s responsible for loss prevention, risk management, US Securities and Exchange Commission reporting, tax and payroll, and restaurant accounting. She is also an executive committee member of the Association of International Certified Professional Accountants Americas Regional Advisory Panel.
But perhaps her most significant role in light of the pandemic is as head of the company’s crisis management team.
The beginning of 2020 looked as if it would be Noodles’ best year yet. Sales and revenue were up, and the company was growing. Then the coronavirus hit. In the last three months, Lockhart has dealt with the closing of all the dining rooms at Noodles’ 458 US locations, the rapid development and roll-out of a new sales app, the furloughing of employees, and a significant drop in first-quarter sales and revenue. Noodles & Company is now in the process of reopening many locations’ dining rooms.
FM spoke to Lockhart recently about how finance helped the organisation respond to the crisis, why collaboration was so important, and what the future holds for finance at Noodles & Company.
(This interview has been lightly edited and sequenced for clarity.)
What were the first signs you noticed that COVID-19 might be a problem for your organisation?
We saw some of the closures happening in restaurant companies internationally, and it was moving fast. I just wanted to learn more about it. We’ve had H1N1, SARS, MERS, and the bird flu come to the United States, but they definitely didn’t have a significant impact on the restaurant business. And this one felt like we saw our comrades closing their international locations for long periods of time. That was happening with Starbucks specifically about that time. And we were like, “Oh, we should probably pay attention to this and at least be ready”. That was our thing. Let’s just be ready for this. Well, we didn’t even have a chance to get ready, and it was there.
What immediate actions did the finance department take in the beginning of the crisis?
It was a stomach-drop moment. In the midst of all those things that were going on, we’re sitting in the background and were like, “We have just lost a tremendous amount of sales in two short weeks,” and with closing our dining rooms, we knew we needed to immediately address our cash burn. In the first two periods of the second quarter, our sales plummeted by 47% and 29%.
So, in that time frame we were looking at, how could we save money? What we could do on the cash burn and modelling every scenario under the sun. The hardest thing I think is, what were our sales going to be? Once 13 March hit and our sales just started to tank. How do you figure out what your cash burn is? Because that’s what the investors wanted to know.
The other thing we did was we moved all of our vendors immediately to 60 days, and we didn’t pay rent that first weekend of April. That was standard. You saw everybody across industry do that.
And like many others, we drew down on our line. We have to be able to say that we’re going to be solvent for 12 months, which, luckily for us, we are. And we’ve communicated that by working with the banks and working with the auditors. EY asked us for the normal assurances that we would meet our bank covenants for the next 12 months, and that means we have to have a cash forecast. We need to know whether they’re going to give us leeway on our covenants or not. So it’s just modelling, modelling, modelling.
At the board level, they started having a meeting every week where they were looking at cash and looking at forecasts, and we were updating the forecast daily and trying to figure it out however we could.
What did that crisis response and the constant need for real-time scenario planning and forecasting teach you?
When you think about it, that’s the difference between accounting and finance. Finance really understands the P&L. What they don’t understand is the balance sheet. And so it was a good exercise. We spent a couple really long weekends working on how we could all collaborate and ensure the balance sheet’s impact on cash was properly reflected. It’s amazing how companies don’t really care about the balance sheet as long as they’re generating cash. We hadn’t paid attention to the balance sheet for a while, so we really had to partner together and look at the balance sheet to see how that was going to impact everything.
The hardest thing about that was where we ended up with our base case. What does that base case look like? Our goal, after we had done all our borrowings from the bank, was to make sure that we still had cash in 12 to 18 months. You’re trying to turn those numbers out as fast as possible and as accurate as possible to show these worst-case scenarios to the board.
The nice thing about my role is I worked closely with the CFO and the folks in finance, and I’m not that far away from that kind of modelling. I’m the one that does all the relationships with the banking and the debt. I’m involved in what’s being presented to them and all the modelling that goes along with that.
How does this crisis change finance’s role in your organisation moving forward?
Here’s what’s interesting about that. I worked for a couple of bankrupt companies, and when you go bankrupt, it feels almost the same as this. You have to manage cash every day. You’re managing your vendors, and everything’s kind of funnelling through our department.
I don’t think that’s healthy for the business because I think our role should be a support role. We should know what’s going on and be able to give you an accurate estimate of what’s going to happen. From a finance side, like forecasts, and then from an accounting side, this is what it’s going to look like on your P&L, so we don’t have any surprises.
So that means we have to continue to just be partners. But I want to be partners as a business partner, not front and centre. So, I hope that we go back to more of a role where we were before because it worked well for us at Noodles. People respect our roles and come to us a lot.
What are your priorities moving forward?
I’ve been in charge of the crisis team for a while, and I think people get complacent about the crisis team. I think that is going to change. I want to plan in advance in the hopes that I can keep my team members safe — that’s our number one goal — and protect our property and protect our business, and try not to be devastated by the next thing that comes along.
I think we can also refocus on important things. How can we streamline to make things better? I asked my team to look at every process [and] tell me what we need to do to make them better. We put together a whole list of those projects. My team has a big focus on really looking at automation now.
[We are] really also trying to get more normalised. We still have a lot of pressure on us to produce the results and talk about that. But somehow I need to get my team back to normal. Normal schedules, normal vacations, [and] even if they’re staying home, just take a break.
— Drew Adamek is an FM magazine senior editor. To comment on this article or to suggest an idea for another article, contact him at Andrew.Adamek@aicpa-cima.com.