Pandemics and Business Planning (#287)
/In this podcast episode, we discuss the impact of a pandemic on business planning. Key points made are noted below.
Planning for the Next Pandemic
Right now, we’re just trying to get through the covid-19 pandemic, but it might be time to consider what impact it will have long-term, on business planning. Obviously, no one planned for it. But, maybe it’s time to start planning for the next one. You might say that the last big one was the Spanish Flu, in 1918, and with such a big gap since then, why bother to plan for it? A key point is that the Spanish Flu was not the last pandemic. According to the Centers for Disease Control, there were declared pandemics in 1957, 1968, and 2009. That means the last one was just 11 years ago, and there have now been four of them in the past 63 years, or one every 16 years, on average. The 2020 pandemic just happens to be worse, because it’s much worse than the average flu, and its mode of transmission makes it easy to pass along.
So, based on recent history, there’s about a six percent chance that a pandemic can arise in any given year. From a risk management perspective, something that can kill your business and which might pop up every 16 years or so is worth some advance planning. That’s right up there with planning for the occasional flood if your business is located in a flood plain.
Breakeven Point Analysis
So, what can we do? First, when engaging in planning, elevate the focus on your breakeven point and how long you can stay in business before running out of cash. By keeping the sales breakeven point as low as humanly possible, your company can still stay in business even when sales drop by a lot. For example, restaurants are being closed because of the pandemic, but you can still order take-out in some places. If I were a restaurant owner, I’d have a plan in place to survive on those takeout sales, which might even include a low-cost marketing plan to tell customers that the business is still open. Or if you’re a gym owner, is there a backup plan to do video training sessions with clients, which everyone can do from home if the gym is shut down by the government?
Cash Analysis
And then there’s that second issue of having enough cash to stay in business. I know a lot of business owners maintain awfully small cash reserves, so they can shovel more money into growing their sales or investing in more assets. But, it might be time to think about being more prudent and scaling back on those growth plans in order to keep extra cash in reserve.
Debt Maturity Dates
Another point is to shoot for debt with longer maturity dates. Sure, you might only need a loan for the next year, but to have extra cash on hand as a reserve, and if the interest rate is low enough, you might want to consider applying for something a lot longer, like a five or ten year loan, or a bond offering – just to have the extra cash reserve in case a pandemic comes along.
Sale of Shares
And along the same lines, if you’re planning to sell shares anyways, then sell more shares. Build up the equity reserve in the business – again, just to keep that extra cash on hand. It also reduces your debt-equity ratio, which might be useful if you ever need to apply for a loan.
Rent Analysis
Another thought is rent. This pandemic is forcing a lot of us to work from home, so talk to your staff about how this is working out. It’s quite possible that this becomes the new normal, where way more employees stay home. Sure, there’s some added complexity in terms of everyone having a decent Internet connection, and computer equipment, and doing Skype calls, but is it really that hard? If this concept looks doable, then take a hard look at how much office space you really need for the company. When your office lease expires, you might want to move into something smaller instead. Which reduces the cost of rent, which reduces your breakeven point even more. I think this’ll be one of the most interesting items to come out of the pandemic. Expect to see a depressed commercial real estate market, maybe for several years.
A nice side benefit of using less office space is the reduced cost of utilities. You don’t have to pay as much for electricity or water, or trash removal, or heating and air conditioning, because less space is being used.
Business Travel Analysis
And an additional thought regarding the work-from-home culture is reduced business travel. Some in-person time is always needed, but it’s entirely possible that a good chunk of those business trips could have been handled through a video call instead. Which reduces the travel budget.
Virtual Conferencing
Another possibility. I totally expect a huge business to spring up for virtual conferences. Not sure how the technology will work, but it makes an awful lot of sense to shift over to this format. Especially when conferences are such a high-grade way to spread a virus to a lot of people within a short period of time.
Supply Chain Analysis
Another issue is supply chains. So far, the emphasis has been on driving costs down by sourcing components all over the world. Now, keeping costs down obviously allows a business to stay competitive, but those supply chains might be worth a rethink. Look at where your most critical components are coming from, and see if they can be sourced really close to home instead. This means balancing the higher cost of local sourcing against the reduced risk of being able to buy from a supplier who’s really close – and who’s more likely to stay open during a pandemic, without having to worry about borders being closed.
If you were to do this with all suppliers, the cost would probably jump too much to keep the company competitive, so instead, look at just those components that are most at risk during a pandemic.
Inventory Stockpiling
And along the same lines, it might make more sense to keep a reasonable stockpile on hand for the most essential components. For the past few decades, the focus has been on driving down inventory levels in order to reduce your investment in working capital. That’s fine, but a massive supply chain disruption like a pandemic can wipe out your production operations overnight.
Again, I’m not recommending a complete transition to massive piles of inventory. Just take a look at what’s really essential, and work on a plan to gradually build up the stocks of those items – at least enough to tide you over through a month or two of disruptions.
Compensation Analysis
Here’s another thought. Compensation structures. It might make sense to explore more extensive use of profit sharing with all employees. The point is to drive down base pay levels to keep a nice, low breakeven level for the company as a whole, but to also hand out some rich paychecks when there’re profits. That way, with low base pay, the company can afford to stay open longer in the event of a pandemic, rather than having to lay everyone off.