Don’t be Forced To Pour the Milk Down the Drain
I know the pandemic has changed my morning routine. Now I take conference calls from the car so that my kids—being taught lessons by my wife--are not so loud in the background. While I was waiting for a call, I heard on the news that dairy farmers were dumping milk down the drain because there was over supply. But just the day before my local grocery store was rationing milk due to over demand. I started to think about how the contracts that bind our businesses can make it difficult to immediately adapt to a market that changes overnight. And how their inability to adapt rapidly was costing dairy farmers millions of dollars despite a continuing demand for their product.
Let’s look at dairy farmers. Like any business, they produce a set amount of product. The interesting thing about dairy farmers is that they can’t turn a switch off to stop production. The cows have to be fed and milked regardless of demand. So, the farmers acquire sufficient dairy cows to satisfy the demand of their in-place contracts. Their fixed costs are directly tied to their forecasted sales based on in-place contracts because they produce and sell to those contracts. If those contracts suddenly stop buying because people are eating at home instead of at school or restaurants, they don’t have buyers. Not because the demand for milk in the marketplace has shrunk but because it has shifted from schools and restaurants to a different consumer—the grocery store. With the pandemic stay-at-home directives, consumers started buying milk solely from the grocery stores that, due to in-place contracts, suffered a shortage when compared to demand. The milk industry was not prepared to shift to a different end-user overnight.
Right now, it seems like everyone is writing about how businesses can or should respond to the Covid-19 Pandemic. Absolutely has the pandemic raised unforeseen business challenges.
Though inspired by the issues and questions I have received from clients in response to the pandemic, this article is not pandemic-response specific. Rather, I want to focus on preparing for the unforeseen--without becoming a notorious “prepper.” I want to focus on helping a company itself to survive this virus and then pouncing to take advantage when times become good again.
Disruption brings opportunity—you just have to be prepared to take advantage.
The go-to strategies in a traditional business environment:
Write a business plan that is updated regularly.
Identify measurable goals: unwritten goals are just dreams.
Forecast growth, revenue, profit, costs, etc.
Identify targets that are strategic and specific (including target dates).
are great, but exactly how do you plan for the government’s telling you that you have to shut your business down for an unforeseen number of weeks?
Open for business or closed, or halfway in-between, your business still has fixed costs that cannot immediately be taken to zero. And if you’re a healthcare business, how do you plan for a massive surge for personal protective equipment occurring simultaneously with a government mandated shut-down of your elective procedures--the so-called cash cows? How do you add the cost of PPE to your expenses?
Rarely does a small business hold a months’ worth of cash to cover fixed costs. And even if you have the funds in savings, how do you plan for losing one-twelfth or two-twelfths or even three-twelfths of your annual revenue? And how do you instantly change supply chains and practices?
The government shut-down put numerous businesses in the position of having to shift to reach their end consumers through different channels. How do you plan for this kind of dimensional shift? Unfortunately, unless you want to tie up your capital and limit growth it is going to be tough. That is not to say that it is impossible. Here are some thoughts:
Control your fixed costs. If you keep your fixed costs as low a percentage of revenue as you reasonably can, you can weather a cash-flow crunch by cutting variable costs while still covering fixed costs and maintain your core equipment and production capacity to weather the crisis. This will allow for the ramp up after the crisis has passed by increasing only variable costs necessary to return to pre-crisis revenue.
Be adaptable—get creative. Remember, you can cut your variable costs like direct materials and production supplies. You just have to come up with enough revenue to meet your fixed costs and essential variable costs.
Conserve as much cash as you possibly can, and try to dig up more. Whether in actual cash-on-hand or room left on your line of credit, identify cash that can be used to weather the storm and fund the necessary adaptations to reach your end consumers.
Don’t over leverage. There are tons of studies on both sides of this issue, but there is little question that appropriate leverage can be used to accelerate growth. You must maintain control over the debt as opposed to allowing the debt to control your business.
Be willing to make hard choices. Cutting variable nonessential costs requires making hard decisions. These hard decisions must be made to maintain the core business. If you lose the core business then it is impossible to come out of the other side of the crisis as a viable entity that is once again able to hire and expand.
The current environment is simply not possible for the small or lower-middle market business to predict. Don’t spend massive amounts of resources trying to do so. Rather, follow the steps outlined above to allow for your business to be nimble and able to adapt.
This may be a time of distress but it is also a time when businesses with sound financial structures and balance sheets can thrive on the disruption and experience significant growth for the future by acquiring market share as less sound businesses do not survive.
Disruption can be the time to grab a larger market share, as distressed businesses fail and are unable to recover. Be prepared to take advantage when the crisis fades away.
