Surviving a period of zero or near zero revenue is extraordinarily difficult. The fundamental challenge is how to use time and capital purposefully. Most businesses have multiple constituents with diverse and conflicting interests. There is no one correct course of action. What is beneficial to one constituent is likely to be harmful to another.
Consider the following: The shareholders, owners and founders of a business have invested their own capital, have taken risk and have worked hard to create equity value. These owners could be individuals, institutional investors, private equity groups and hedge funds or could be a publicly owned company. They could be US citizens or foreign entities. Should the protection and retention of owner and shareholder value be the primary and controlling objective?
Questions for Businesses in Crisis
Most businesses are dependent upon their employees; the following factors need to be considered:
- Should management continue to pay employees during a period of zero revenue and, if so, for how long?
- Is that an appropriate use of business capital? Or should labor costs be minimized and capital preserved to fund a restart?
- Employee expenses can be reduced through layoffs with government provided unemployment compensation offering some financial support.
- The use of furloughs is an alternative to layoffs that simplifies the reinstatement process for employers, but might preempt unemployment compensation, depending upon the state.
- Employees could be retained at substantially reduced levels of compensation, while continuing some benefits.
- There can be a combination of labor force reduction initiatives designed to retain critical or highly productive personnel. A complicating factor is the federal WARN Act that requires employers to notify employees in advance of workforce reductions. This notice period can be as long as 90 days depending upon state and business size. There is an exception to the WARN Act notice period referred to as “unforeseeable business circumstances” that eliminates the notification period. The current Coronavirus crisis apparently could apply. Many states, however, have their own version of the WARN Act that might not allow that exception. Labor force reductions are never simple.
How to Manage Cash
The preservation of cash is mandatory. What is to be done with accounts payable owed to a company’s many vendors and suppliers? Some expenses must continue to be paid, but others can be deferred. After all, if revenue is zero, there is no need for materials and supplies and no concern about a vendor’s threats to stop shipments. Critical vendors needed for a restart could be paid a negotiated amount to maintain relationships. The problem is, however, whether vendors that are paid will survive their own zero revenue scenario. Keep in mind that the receipt of a company’s own accounts receivable, probably will evaporate for identical reasons.
Most businesses have some form of debt, whether as a working capital facility, term debt, or mortgage. This debt has mandatory interest and principal payments. A downward change in the value or collectability of a company’s accounts receivable, combined with a market drop in inventory value will cause the borrowing base of most working capital facilities to decline significantly, thereby triggering loan defaults. The previously friendly banker has now become antagonistic. Should cash be used for principal and interest payments, or should the banks be told that they must forbear and, if so, for how long? At some point, loans will be called and security collateral claimed. But what is a bank going to do with foreclosed assets on businesses that have zero revenue? And, how long would the foreclosure process take?
Cash is critical. Is it to be protected and retained by owners for a potential restart? Is it to be used to pay the banks? Is it to be used to retain employees? Is it to be used to pay critical vendors? There is no simple answer as reality requires a mix and balance of cash triage. The major unknown is how long the period of zero or near zero revenue will continue. An extended period will deplete all cash.
Management has a huge challenge. Most executives are not experienced in turnaround and crisis management so will not know how to respond and/or will not act quickly or decisively enough. There will be intense pressure and threats from all fronts: directors, officers, shareholders, bankers, investors, employees, unions and vendors. All will have conflicting interests.
Most investor groups care primarily about protecting and maximizing future enterprise value. The business must survive and it must be positioned to take advantage of the misfortune of competitors. There is a scenario that supports the investment of additional capital necessary to weather the zero revenue crisis, as well as position the business to leverage all advantages upon recovery. There could be a real opportunity to gain significant market share.
Keeping the Business Alive
The real challenge of zero or near zero revenue is how to keep the business entity alive. This requires a vision for the future. In fact, this is imperative. Any philosophical issues owe their existence to the creation of the business in the first place. Without the business, there would be no shareholders, employees, vendors, or bankers. Zero revenue is the ultimate crisis. All must be done to ensure that the business survives, is positioned to reconstitute itself, and prospers. Successfully leading a business through such a crisis is a major challenge for most executive management teams. Critical decisions must be made quickly with limited information. Time and
the unknown are the enemy. Capital is the only ally.
The health, economic, and social impact of the Coronavirus pandemic is unprecedented. Businesses in the United States have never before been subjected to such a wide reaching government mandated shut down, while ordering people to remain in their homes. The combined effect of these two forces effectively drives revenue toward zero. The length of time these orders will remain in effect is uncertain and could be a matter of months or longer. The unknown element of duration makes traditional crisis management planning indeterminate.
Most crisis situations in business are caused by marketplace disruptions that impact companies to varying degrees. Profitability suffers as the combination of fixed and variable operating expenses exceeds revenue. There is, however, some revenue. The challenge of crisis management becomes one of rapidly balancing revenue and expense. This generally is achieved by examining all possible means of reducing costs, micro-managing available cash, increasing productivity, and implementing innovative marketing programs to retain existing customers and to attract new customers from competitors. Discipline, speed, and creativity are essential. A traditional crisis management plan can be developed that integrates available capital reserves, monthly operating cash shortfalls, and the time available to effect a turnaround given available funds. The ability to attract a new capital infusion extends the turnaround window.
The Best Turnaround Strategy? Take Action.
Zero and even near zero revenue obliterates not only the game, but the entire playing field. Traditional crisis management protocols alone will no longer suffice. Business survival depends on rapidly developing and implementing creative and innovative ways to conduct business that deploy critical, out-of-the-box thinking. This requires the combination of crisis experience, judgment, intuition, and marketing insight to divine that which has never existed before.
In summary, there is no one approach that will work for all businesses facing zero revenue. What works for one might not be applicable to another. The common denominator is action. The answer may not be readily apparent, but it does exist. In a zero revenue environment, time combined with inactivity will deplete available cash and capital reserves and the outcome becomes inevitable. Take action. It may not be perfect, but perfection is not the goal. Survival is.
InterimExecs RED Team is an elite group of CEOs, CFOs, and CIOs who help organizations through turnaround, growth (merger, acquisitions, ERP/CRM implementation, process improvement), or absence of leadership. Learn more about InterimExecs RED Team at www.interimexecs.com/red-team or call +1 (847) 849-2800.