COVID-19 UPDATE: Financial Impact on Businesses

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CRISIS MANAGEMENT

The economic disruption created by social distancing, which is essential to public health, creates a financial crisis for all businesses and their employees. The pain is most heartfelt for those who are suddenly without the income that is needed to pay normal and necessary daily expenses.

We all cheer the efforts of our federal and state governments to ease the pain for individuals and families over the near term, and to create programs that will help businesses survive or even restart after being totally shut down by the crisis. But it is the responsibility of our business leaders to create and implement plans to weather the storm and give all economically dislocated people the best chance possible to return to their jobs once the virus is defeated.

The three fundamental steps that state and federal government leaders are taking to attack the public health crisis are ASSESS, PRIORITIZE and ACT. It is no different in attacking the financial crisis this battle creates for business. And as is the case in most crises, it is not just the potential severity of the problem that is of concern, it is also the rapidity and regularity of change. New information, unforeseen developments, unexpected reactions, all happening over a short time frame, can and do change the playing field. Similarly, poorly chosen actions, taken in the absence of a plan, can also have a significant negative impact on the effectiveness of the crisis response over the longer term.

Effective crisis management requires a balancing act between taking action to avoid imminent disaster, and perfecting actions based on full and accurate information. By definition, crisis means action must be taken without perfect information, but no action should be taken in a vacuum, or in a panic.

Effective crisis management requires assessing, prioritizing and acting in the most intelligent way possible given information available at the time. It requires the discipline of creating a strategic crisis management plan that is adaptable and evolves as improvements in information or changes in the environment become apparent. Leaders must constantly re-ASSESS, re-PRIORITIZE and ACT, again.

Ideally, with time, the strategic crisis management plan will take into consideration all reasonably possible scenarios. It will define and map out, along alternative paths, potential changes in the environment, alternative assessments, differing priorities and alternative actions. As the crisis evolves and new, better information becomes available, the paths can be broken down, parts re-matched, like a living puzzle, to perfect the path and successfully navigate all the potential pitfalls of crisis management.

Joseph C. Jessup, CFA
President & CEO
JCJCo., Inc.
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At this time of extreme economic distress in the New York Metro area, many business owners and CEO’s are facing a financial crisis. I’d be happy to assist with your planning in any way possible, particularly if it involves unresolved loans, leases, rental commitments or other payment obligations. Please, reach out.

For a video conference appointment, simply email me directly at jcjessup@JCJCo.net.

JCJCo provides CFO services to high growth startup and emerging middle market businesses across all industry sectors. The JCJCo team has over 55 years of experience in finance, accounting and strategic planning, including operational and financial crisis management.

Attacking a Profitability Problem

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I’m amazed by the myriad of “tips” and “secrets” you can find on the web, lists of things you could do to solve virtually any problem. The experts creating these lists mean well, its good food for thought. But most would also admit that there is no magic, one size fits all, recipe for success, particularly when it comes to solving a profitability problem.

Be it a company with 10 employees or 500, success in attacking a profitability problem is almost totally a function of having an accurate definition of the problem, and coming to that definition is easier said than done. Common pitfalls when doing the needed analysis include: confusing symptoms with the root cause, defensive thinking, and a scope or focus that is either too narrow or too broad.

Moreover, it’s very important that the definition also be actionable. Analysis may have identified the problem as one product, a clear money loser on its own, but dropping that product may risk losing key customers who buy multiple products and prefer to use one supplier to fill all their needs. The problem needs to be redefined so that the solution avoids assuming a high risk of undesirable results, such as creating another profitability problem.

If profitability is a concern, wise CEO’s will invest in the analysis required to come to an accurate and actionable definition of the problem. It is equally wise to consider the value of using an outside expert who can bring a high level of analytical skills to the table, and provide greater assurance of independence and open mindedness in the analytical process.

JCJCo., Inc. provides business and financial consulting services to companies in transition. We tackle financial management challenges commonly caused by high growth, rapid changes in the marketplace, business combinations, employee turnover and other unusual or disruptive events, filling the need for expertise on an interim or outsourced basis.

Do Middle Market and Smaller Businesses Need a Strategy?

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The vast majority of middle market and smaller businesses, even some with up to $20 million in sales, would say “I know who my customers are and what they want” or, “I know how to make a sale and manage my costs” so, “I don’t need a strategy.”

That’s what the owners of my local drug store said to themselves, and they were doing fine, until Rite Aid came to town.  And my graphics designer/printer did great work on a broad range of print jobs, using a ton of specialized equipment he had invested in over the years.  Then Vista Print, 99Designs and other low cost alternatives cut his legs out from under him.  These are smaller, acutely focused businesses that serve to simplify and highlight strategy challenges, but similar examples can be drawn from larger middle market companies in industries like cable and wire manufacturing, text book publishing, or automobile parts producers.

The question of business strategy is different for much larger companies like Kodak, Pitney Bowes and IBM. They have multiple products, compete in many different markets, and have the financial capacity to sustain challenges and invest in a plan that redirects resources to re-energize profits or growth.  And despite monumental changes in each of these three companies’ markets, secular changes that relegated super star products and services into “has been” remnants of the past, they continue to battle, constantly fighting to reinvent their businesses, some with more success than others.

By contrast, a middle market and smaller businesses have less flexibility, arguably limiting strategy choices.  But that reduced flexibility makes good strategic decision making even more critical.  My local drug store could have prepared for the risk of a Rite Aid opening down the street, refocusing on a high growth market like nutritional supplements.  Instead they chose to take Rite Aid on, believing in their long standing customer relationships, and were eventually forced into liquidation.  My printer could have proactively sold off his high cost specialized printing equipment, shifting focus to high margin design capabilities and outsourcing production to low cost printers.  Instead he kept production in house, running a wide range of low margin jobs.  He was eventually forced into change, initially cutting the large space he had acquired to house his equipment in half, then to a quarter, and eventually closed.

Challenges faced in business can be large, one time, secular shifts in supply or demand, such as those faced in these discrete small business examples.  But market changes can also be far more subtle or cyclical, like evolving consumer preferences, energy and interest cost swings, or demographic trends.  And whether the risk of change is secular or cyclical, sudden or subtle, the thought process and plan to deal with such changes is your strategy.

You may see a risk, and in response, plan to hunker down behind the strength of customer relationships, like the local drug store.  Or you might hesitate to change, or admit that prior decisions were wrong, and rationalize not selling off that high overhead equipment based on a preconceived notion about how owning it adds to your market strength.  Even though you are not taking overt action, just sticking to your guns, that is your strategy.

A “do nothing” strategy can be a valid approach, primarily when the challenges faced are cyclical.  You might simply cut costs to weather the storm, then plan to rebuild when the market improves.  But cutting cost can be dangerous, equating to cutting out your legs from under you.  And market risks can be misread, thought to be short term pressures rather than significant and permanent change.  A conservative and low cost “do nothing” or cost cutting strategy can be very risky in and of itself.

Larger companies constantly review and revise their strategy, employing a strategic planning process, and in many if not all cases, seeking out the opinions of experts from outside their business.  They realize that their own planning process can be tainted by natural resistance to change, or be flawed by the many ways internal decision makers can get “invested” in prior choices, rationalizing strategic decisions to protect and perpetuate bad decisions made in the past.  By involving third parties to develop and review information and facts, companies add an objective and trained resource to the team, gaining perspective that is not polluted by preconceived notions or defensive thinking.

The rationale for middle market and smaller businesses to consult with strategic thinkers from outside their business goes beyond those reasons used by larger companies.  The owners and managers of smaller, middle market companies can be, and usually are, consumed by the day to day demands of the business, putting our fires, trying to close that next sale.  They have little time to sit back and think about the bigger picture, or collect and analyze the information needed to make those decisions that will define their long term direction. Bringing a temporary, expert resource on board fills this gap and creates a focus on strategic, long term planning that is otherwise easily lost in the shuffle.

Middle market and smaller businesses have another common characteristic that makes strategic planning even more critical.  They tend to be owned by individuals or families that are reliant on that business for not just current income, but also as a storehouse of the individual’s or family’s wealth.  Quite commonly, the value of the business represents most if not all of that individual’s long term savings, intended to be tapped into for a child’s education costs, retirement income and many other personal financial needs.  In these cases, the business strategy is essential to personal financial health, and personal needs can and do have an impact on defining an appropriate business strategy.

JCJCo provides strategic plan development, strategy review and ongoing financial management services to middle market and smaller businesses.  We fill the role of your “outsourced CFO”, bringing institutional, corporate level expertise to the table at a cost that fits the size of your business.  We also have a team of specialists in personal financial planning and estate matters on call, enabling us to address your business and personal planning and strategy challenges in tandem.

Call today for a free consultation, and to learn how JCJCo can provide the information, experience and insights you need to make good decisions, support the long term success of your business, and protect the financial health of you and your family.