Understanding the Economic Impacts
Safeguard Liquidity and Revenue
Optimize Costs
Invest in Growth
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Invest in Growth
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During an economic downturn, or a crisis like the current pandemic, prudent cash flow and liquidity management can often determine whether a business struggles or prospers. In addition to revising cashflow projections and re-evaluating financial forecasts, there are several short-term measures management teams can, and should, undertake to increase liquidity and mitigate revenue loss.
As cash flow and liquidity levels begin to stabilize, cost optimization strategies can help an organization stay resilient and begin to position itself for the future. When it comes to optimizing costs, slashing expenses across the board is not a recipe for success—instead, by investing in productivity and innovation during tough times, businesses can fuel the engine for eventual growth.
Optimize Costs
While the effects of the pandemic and recession will be long-lasting, efforts to strengthen organizational resilience will help put businesses on the path to recovery. When opportunities emerge—and they will—they will most likely necessitate investment that may require reallocating budget or raising additional capital.
Invest in Growth
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1. Investigate All Expenses
Safeguard Liquidity and Revenue
persevere
MAINTAIN
RECOVER
Optimize Costs
persevere
MAINTAIN
recover
Examine every expense, focusing on the largest costs first.
Safeguard Liquidity and Revenue
increase liquidity
mitigate revenue loss
Refresh your organization’s risk profile based on current risk appetite and tolerance.
Reduce variable costs
increase liquidity
mitigate revenue loss
Now is the time to scale back on any nonessential purchases, including anything that doesn’t directly contribute to the day-to-day operations of your business.
Halt nonessential purchases
By extending payment terms with suppliers, you’ll reduce the immediate financial burden to your organization, allowing yourself more time to recover.
Negotiate longer payment terms with suppliers
Negotiating debt servicing extensions or covenant relief with lenders will allow you to better manage short-term costs. This highlights the importance of maintaining good relationships with your lenders.
Negotiate a debt service extension
or covenant relief
There are several federal government relief programs that your organization may be eligible
for, many of which have very low interest rates or even loan forgiveness possibilities.
Learn about the available options here.
Apply for a low-interest government loan
In addition to government loan programs, there
are also several tax relief provisions that may be helpful in reducing tax liabilities in the short or medium terms.
Take advantage of tax relief provisions
In certain situations, filing for bankruptcy may be
the best option, as it will allow your organization
to reset and establish a plan for reorganization, undergo a liquidation of problematic assets, or even orchestrate a transaction for the sale of the business.
File for bankruptcy protection
In most cases, there will be lost revenue. Establish priorities as opposed to wasting resources fighting for every dollar.
Expect some degree of loss
Focus on your biggest and most important customers. And don’t neglect to take into account those that are most insulated from coronavirus-related risk.
Focus on improving relationships with key customers
Now is the time to focus on top-selling products and services. Be open—and agile—about pivoting based on demand.
Pivot your product or service offerings to those in high demand
Speed to market is important in challenging times. Focus on quick wins to generate improved cash flow.
Identify product or service innovation quick wins
Establishing a pricing model that incorporates flexibility will position you for long-term success.
Revisit your pricing model to provide more flexible and affordable options
Real estate is often a large expense where significant savings can be realized.
Look for opportunities to negotiate discounts. During a recession, your vendors may be flexible on pricing.
Review IT infrastructure costs, identifying applications that are not widely used or that may be redundant.
Focus on larger costs that were previously masked by high levels of revenue but where those revenues may have decreased.
Look for ways to unlock operational efficiencies and reduce costs by streamlining processes and reconfiguring supply chains and systems with suppliers and third-party vendors.
2. Reduce Costs Where Possible
Align spending with the products and services in highest demand and those driving the most profit—determined by real market data and conversations with your biggest buyers. 80/20 can help you identify these areas.
Leverage technology to automate certain types of work processes to reduce labor costs.
Renew focus on quality in not just products and services, but also information and data that will serve your organization in the future.
3. Invest with Intention
3 Steps to Effective Cost Optimization
Cost Optimization with the 80/20 Rule
If everything is a priority, then nothing is a priority. The 80/20 rule—formally known as the Pareto Principle—is simple: 80% of outcomes result from 20% of efforts.
An 80/20 exercise can help you align costs, ensuring you don’t risk your most profitable relationships.
Take the BDO 80/20 Rapid Assessment
Use the BDO 80/20 Rapid Assessment to identify “quick win” revenue and profit increase opportunities; develop an understanding of the current distribution of cost and profits among various groups of customers, products and/or projects; identify and prioritize potential business improvement initiatives; and build an informed roadmap for cost optimization.
Internal Sources
Tax Credits & Incentives
External Financing
Partnering
Retained Profits
One of the main sources of funding for many businesses is retained earnings and profits. This is often the best option—and one that in most cases should be considered before debt or equity funding.
Internal Sources
Tax Credits & Incentives
External Financing
Partnering
Sale of Assets
Another primary source of capital comes from the sale of assets—whether obsolete or duplicative for your organization or simply no longer a priority.
Working Capital
Analyze your organization’s assets and liabilities, looking at cash flow, inventory levels, outstanding debt, accounts receivable and other factors to make better decisions about how you can use working capital to fund growth.
If your organization is spending money to try to develop or improve a product, process or software, and it isn’t claiming an R&D credit, then you are probably leaving money on the table. Check out our R&D tax credit calculator to find out whether you are eligible.
There are R&D tax credits on the federal, state and international levels.
FDII Deduction
For C-corporations, or partnerships with C-corporation partners, with revenue generated from international sources, there are preferential tax rates to apply to that income. For more on these provisions, read here.
Debt Financing
Debt financing can allow your organization to raise new capital without giving up control. However, the regular payments and risks of default rise if the economy doesn’t find its feet.
Equity Financing
Equity financing, on the other hand, allows you to raise substantial capital that can help fuel growth, if you are comfortable giving up partial ownership of the organization. Whether through private equity investors or an IPO, equity financing can bring in capital, but it comes with the expense of reduced control.
Government Grants & Subsidies
Applying for government grants or subsidies may help certain types of organizations bring in additional resources for specific purposes, often without the need for repayment, or it may provide such organizations with tax breaks or tax-favored funding.
Crowdfunding
In certain cases, crowdfunding may be an efficient way to raise startup capital at the same time as you validate a project or business.
Joint Ventures
By partnering with third parties with similar objectives, your organization may reduce initial startup costs for certain projects or business lines, while still allowing for growth.
M&A
Merger or acquisition activity—combined with a successful post-M&A integration process—can allow businesses to reduce costs or gain other efficiencies that allow for growth or investment in certain products or services.
Private-Public Partnerships
Arrangements between public entities and private businesses can offer cost savings and efficiencies for certain categories of projects (traditionally focused on infrastructure). By sharing risk, organizations can gain the upside of growth and innovation while reducing potential downsides.
