Some of the largest challenges that many of us have faced in our careers occurred during the COVID-19 pandemic. At the start of the pandemic, I was leading finance and accounting for a middle-market luxury home furnishings company, which experienced a quick drop in sales in late March and April of 2020. This instance of crisis management in finance, meeting adversity and charting a course through challenges is a good reflection of how leaders can support flexibility and adaptation to the fast-paced changes brought about by any crisis.
Managing Cash Balance
The company had always been financially conservative but operationally aggressive in the pursuit of growth. In this case, we took a very careful and cautious approach to ensure access to cash to keep the business running smoothly.
Our first financial activity was entirely based on managing our cash balance to ensure business viability. We met that drop in sales with a detailed cash receipts and disbursements forecast to empower decision-making and a daily focus on the cash balance. We also changed banks (over a weekend) to enable prompt access to a Paycheck Protection Program (PPP) loan. With that change in banks, I negotiated a doubling of our credit line as well. We cut every expense that we could, and some, such as travel and trade shows, were cut for us. We also put in controls for spending, with approval limits by person and a secondary review of every payment as weekly payments were being made. We also had to make the particularly painful decision to pursue limited layoffs.
One final key to this instance of crisis management in finance – we didn’t cancel any orders with our vendors. We slowed some orders down to manage our cash flow, but avoiding cancellations bought even better relationships with our vendors.
Shifting the Focus Toward Income
The next step was a line-by-line budget down to net income, focusing on income rather than just cash. This was the first time the company had pursued this level of detail. I met with various leaders of the business to model each and every line of our detailed income statement. Some lines were rough estimates, others were driven by revenue and the payroll expense budget was built month-by-month for each employee with compensation including estimated overtime and bonuses. This allowed a detailed review of all costs and the ability to review variances every month against present-year expectations rather than prior-year actuals.
A lot of this activity decreased reviews of every variance to prior year and put focus on the variances to budget in the present year. For example, we wouldn’t need to discuss an increase in rent from prior year if it was just the lease for a newly acquired property that would already be reflected in the budget for present year. The approach offered a way to shine a spotlight on what was truly an unexpected variance, good or bad, that needed additional review.
Scenario Planning & Active Monitoring: Tools for Crisis Management in Finance
At this point, we had prepared financially for a severe downturn but left incoming product available as needed. Operationally, the business let everyone who could work from home do so, and we also put protections in place for everyone who couldn’t. This set the stage for reasonable and manageable business results and business stabilization despite the environment. Our plan from here was to monitor daily, weekly and monthly results and adjust as needed. We looked at a variety of scenarios to ensure we had a reasonable plan with various options for success. These scenarios included a variety of sales levels to ensure we had a solid game plan for fairly significant decreases over many months.
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Running With Opportunity
What came next was a great surprise to the business – as we got to summer, the business began to meet and exceed pre-COVID sales targets. The combination of people locked in their houses without travel and other ways to spend money turned out to be a strong driver for the company’s sales growth. Our sales grew at a much faster rate than our already high growth rates, driving the company to record sales for days, weeks and then months. Combined with tight expense control, we ended 2020 with record sales, record profit and record cash.
The major push behind cash flow at this point became having the right cash at the right time to provide access for major investments in doubling the size of our corporate headquarters/warehouse and taking additional space in showrooms and tradeshows.
It is definitely a balancing act to gain comfort in moving forward through uncertainty. This was a period of reflection to ensure our recent sales successes could support long-term capital investments. We needed additional warehouse space before COVID, but with the long-term nature of real estate, we focused on taking space that would support the business for years to come.
Additionally, we looked at an acquisition and had discussions with companies that wanted to invest in our company. We prepared two valuation exercises – one with an investment bank and the second with a tax valuation expert. We also chose a company to embark on a quality of earnings exercise.
Adjusting to a New Landscape
Last, but not least, was a review of underperforming pieces of the business. The most important exercise here was the consideration of opportunity cost. This was a step beyond cash or income to understand where the best return on investment was going to come from.
This is a tough exercise, particularly for people who are used to successful ventures. Simply put, it is best to invest in areas with high probabilities of high returns. If a company, division or product hasn’t been as successful as others, it pays to try and understand why and determine the best path forward. The difficulty arises when details necessitate the emotional, painful decision to close a business.
The business was producing significant cash that had always been invested back into the business or new product/brand introductions. Some places needed more focus and investment to drive them to success.
When assessing options, my primary question was always: How do you focus enough on the smaller products and entities to ensure their success? The secondary question was: When do we close off the funding and stop the new venture?
This led to a lot of spirited discussions as we found footing for these businesses. In all cases to that point, the answer was adjusting plans and strategies, but not closing off any funding.
Crisis Management in Finance: The Relationship Between Strategic Planning and Flexibility
All in all, this is a story about flexibility. No matter how good our forecasts are, the Black Swan events can impact us in strange and volatile ways – and often to better or worse degrees than we might assume. Having a strong finance leader in place allows companies to remain flexible enough to adjust quickly to decrease risk and take advantage of opportunities when they arise.
You can learn more on our financial planning & analysis page, and if you have any questions, we’d be happy to answer them. If you’d like to explore the process of financial forecasting, you can also download our free guide:
About the Author
Bob has 25 years of finance and accounting leadership experience serving companies from the Fortune 500 to the middle market. Prior to 8020 Consulting, Bob led finance and accounting as the Vice President of Finance for Ardmore Home Design, a high growth wholesale luxury furniture company. He has leadership experience with TechnipFMC (oil and gas equipment and technology), Panasonic (in-flight entertainment and communication), Hawker Beechcraft (general aviation) and Ford Motor Company. Bob also worked with the CapAnalysis Group as a litigation consultant supporting attorneys and clients with finance, accounting and economic analysis. Bob holds an MBA in Finance and Accounting from the Ross School of Business at the University of Michigan and a B.S. in Economics from the W.P. Carey School of Business at Arizona State University.