The COVID-19 crisis has hit the world when the global economies, and the Indian economy in particular, were already facing serious headwinds. It would therefore not be surprising if Finance teams in many organisations had started preparation to deal with the coming downturn even before the onslaught of the crisis. Of course, no one would have anticipated to get hit by the ferocity with which COVID-19 has hit the economy, bringing the wheels of commerce, in many sectors, to almost a grinding halt for a material period of time.
Immediate response
The first response, when it dawned that the revenue generating activities of the companies may be shut for an extended period, was to think of cash conservation and business continuity. With cash inflows from revenues almost entirely stopping while cash outflows on fixed costs continuing, the CFO first looked at securing adequate liquidity by arranging for sufficient borrowing facilities to ensure business continuity. What was even more unsettling was not knowing how long this period of negligible cash inflows would continue. Scenario planning therefore became the only option to plan for the worst.
Along with cash conservation, came cost reduction. Following the now much clichéd saying – never waste a good crisis – cost reduction plans came to the fore in these situations. COVID-19 made many companies that always wanted to adopt Zero based budgeting to perhaps do it for the first time when the need for any cost to exist was questioned. One of the main goals in this exercise was to also try and convert most fixed costs to be as variable as possible. Cost reductions could be across the board – from reducing customer discounts and channel pay outs, to employee cost reductions, rent renegotiations, relook at the need to travel, etc. Discretionary costs like advertising tended to get substantially reduced as the level of activity came off significantly. However, along with cost reductions, some companies found it prudent for higher investments in certain areas – digital transformation, in particular. Any cost that provided an opportunity to increase revenues got priority.
Medium and long term opportunities
A crisis of this nature gives an opportunity for an organisation to create a more sustainable cost base. Increasing the level of automation brings in significant efficiencies and cost advantages. Many organisations are looking at permanently having a certain percentage of their workforce work from home, thereby reducing real estate and associated costs. Work from home also brings in the opportunity to employ people who may not want to work full time. The employee continues to work with perhaps a lower salary but with far more flexibility in work hours than previously thought possible. Right sizing of the employee base is another possible opportunity that can give sustainable benefits in the future. Another area of focus can be relooking at businesses or channels or initiatives that are not adding adequate value. In normal times, these unprofitable parts of the business are not critically evaluated on a “need to exist” basis. Examining every element of capital employed like inventory levels, extent and quality of receivables, credit terms from suppliers, investments in manufacturing and other facilities, etc. and working on reducing them is a crucial part of creating a sustainably profitable business.
Even as one looks at cost and efficiency, one should not ignore the opportunities that the crisis also offers. Consolidation is a great opportunity as weaker players succumb. Companies with good Balance Sheets therefore can look to scaling up their businesses materially by looking at M&A opportunities. As they say, this crisis shall also pass. How well the Finance team managed it will possibly determine how well the company could do in the future.
