When R+Co CFO Sam Paik, CPA, CGMA, realised the severity of the coronavirus crisis sweeping the globe, and the impacts it might have on his business, he quickly called his executives together to make a plan of action.
R+Co, a prestige hair care company based in Miami in the US, had set out its short- and long-term strategic objectives for 2020 last year, but Paik knew his team would need to revisit them in light of the crisis. They reassessed their priorities, cut spending in some areas, and adjusted their distribution channels as part of their short-term crisis response. But, with a view to the longer-term payoff, they also took steps to support their customers and partners who were at risk of closure. That way they have been able to weather the ongoing COVID-19 storm and prepare for the next potential disaster, whatever it may be.
Like most executives around the world, Paik is worried about a potential second wave of the pandemic in the fall. But there are numerous other possible threats on the horizon, too. Businesses could suffer from knock-on effects of the virus, such as supply chain disruptions or lasting changes to consumer behaviour.
Alternatively, for some companies, the next crisis might come in the form of an unusually bad US hurricane season, drought, a trade war, the fallout from Brexit in the UK, or — as more and more people work from home — cybersecurity attacks.
Regardless of what the next disaster might be, it is essential for finance departments to allocate enough strategic and financial resources to sufficiently prepare for those possibilities while simultaneously putting out the current COVID-19 fire.
Back to the drawing board
According to Andrew Grimstone, a financial advisory partner at Deloitte based in London, the first thing to do is revisit your business plans and think about your "must-haves".
"Decide what's the primary purpose of your business. What are the core activities? To preserve the business, what do you have to do? And spend money on that," he said.
At R+Co, the executive team got together the first week of March to reassess strategic objectives and establish new ones. They decided that, in order to not only survive the immediate impacts of the COVID-19 crisis but also to be well-positioned should another crisis emerge, it was essential to adapt their distribution channels. But rather than merely diversifying away from brick-and-mortar salons, which are key partners with whom R+Co has long-lasting relationships, they worked together with those businesses to help ensure their survival.
They created an affiliate programme for the salons, many of which are small, family-run businesses that faced a real risk of closure. Now, each time a salon refers a customer to one of R+Co's products online, it receives a 40% commission on the sale — notably higher than the industry standard of 5%–15%. R+Co also creates fresh content each week to help the salons market the products.
"If our objective was merely to focus on our own short-term survival without thinking of our sales partners and the long term, then we would not have made our affiliate program so rich with a 40% commission to salons," said Paik. "But our objectives were different — keep all of our distribution channels warm, focus support for the salon community, and do our best to generate cash flow for them while their doors were unable to open, and hopefully generate goodwill and be recognised as the hair care brand that demonstrates we value customer relationships as much as financial success."
He noted that R+Co's 2020 strategic objectives were different than what's being executed, but that COVID-19 had allowed the team to reconsider their identity and business plan.
Paik also stressed the importance of having good fundamentals in place, which helped him make quick decisions during the crisis and which he would fall back on if another disaster were to occur. Those fundamentals include accurate and timely reporting from the accounting department; planning for contingent moves; having a creative, business-minded treasury group; adopting a more customer-centric focus; and taking a data-focused approach to financial analysis.
Financial directors must next take steps to adjust the business and do what is necessary to meet the objectives they have outlined. For many CFOs, building up cash reserves was top of mind when the COVID-19 crisis swept the globe.
"Everyone's eyes turned to cash," said David Biggs, ACMA, CGMA, CFO of Farewill, a UK-based digital service for wills, probate, and cremation. "You need enough cash to get you through the unknown circumstances — to keep operating."
Importantly, having cash on hand enables you to keep financial and risk teams well staffed.
"It means you don't drop the ball on things like cybersecurity, the possibility of a second wave, or potential Brexit fallouts," Biggs said.
One way to preserve cash is to simply not waste it. According to Gregg Thomas, CPA, managing director, BDO USA, some businesses in the US have mistimed their reopenings, and should be more carefully weighing the pros and cons of doing so.
"Don't hurry to reopen if you're not going to have a prayer of making money," he said.
As a rule of thumb, Thomas advises the restaurants and other businesses he works with to keep 90–120 days' worth of cash on hand.
To build up R+Co's cash reserves, Paik and his team accelerated payments from customers in return for discounts and concessions, while simultaneously renegotiating contracts with vendors. They also thought critically about return on investment and only prioritised investments that they agreed upon unanimously.
R+Co even delayed a product launch during the pandemic because the forecasted time it would take to recover the cost of development and inventory wasn't fast enough to risk launching it during the pandemic.
"Everything has to be on the table for discussion and consideration," said Deloitte's Grimstone.
But, while cutting back on spending and investments can be helpful, in order to ensure you are prepared for future shocks, it is crucial to avoid scorched-earth strategies that could damage your business down the road. Unless you are in absolute survival mode, you should do what you can to maintain your talent as well as relationships with key partners and clients.
"We know there will be a tomorrow, and for us, to hit our long-term objectives tomorrow, it's our talented people that are going to get us there," said Paik. He chose to prioritise staff as much as possible.
And, just as R+Co supported salons in its distribution network, Deloitte's Grimstone said finance teams need to identify critical partners, whether suppliers or customers, and ask what they can do to help if they are struggling.
"Communication with those people — understanding what their financial position is and consequences of them having problems — is just as important," he said.
Look for opportunities within the crisis
Farewill is in a unique position in that it is a countercyclical business. Because it operates in the funeral industry, it has experienced an increase in activity during the pandemic. That said, like any executives, Farewill's team must also think about external factors such as cybersecurity and potential disruptions to the technology or financial facilities the startup relies on.
But businesses do not have to be countercyclical to find opportunities within a crisis. Disruptions offer any company the chance to diversify revenue channels, update product offerings, or strengthen balance sheets.
According to BDO USA's Thomas, many restaurants he advises have opted to shrink their menus since the COVID-19 crisis. They might have originally gone this route because they did not have enough staff to produce a full menu, but many are now realising that smaller menus could drive down food and labour costs in the long term, too.
Another example he cited was a restaurant he works with that offers organic fare and began examining alternative distribution channels when it was forced to close during lockdown. Grocery stores have generally not been as negatively impacted by the crisis, so the restaurant chain decided to pursue small, independent grocery stores as new distribution channels, leaving it in a stronger position should a second lockdown occur.
Don't wait for a return to routine
Though many CFOs already had disaster plans in place, the COVID-19 crisis is unique in that it is longer lasting and more wide-ranging than the one-off disasters most finance departments had planned for. It affects all parts of businesses and economies, and could also have lasting knock-on effects on various industries.
"If I had to go back in time, the first thing out of my mouth would be: 'This is not going away — we have to make permanent changes,'" said Thomas.
According to Deloitte's Grimstone, even businesses that previously had disaster response plans in place should be revisiting them regularly and incorporating lessons learned from the pandemic.
"You've got to dedicate sufficient resources to upgrading and putting in place these things, and if you haven't got the right capabilities, get some advisers in — hire additional people to get this up and running," he said.
That should be a top priority, even as the COVID-19 fire rages on.
"You've got to stop waiting for 'normal'," he said, "because it may never be normal again."
— Portia Crowe is a freelance writer based in the UK. To comment on this article or to suggest an idea for another article, contact Drew Adamek, an FM magazine senior editor, at Andrew.Adamek@aicpa-cima.com.