Business Planning in the Age of Covid-19

Written By:  Arnie J Olsen

There is little that is more stressful for a small business owner than entering a period of time where revenue is dramatically decreased or even cut off completely, but in the face of these extraordinary times, there are some decisions you can make that could mean the difference between surviving and losing your business.

The thing I feel like most politicians, and certainly most employees, fail to understand about life as a small business owner is that frequently, someone starting a business has already tapped all or nearly all of their personal financial resources to get their operation off the ground, so they are left with a razor thin margin for error when it comes to dealing with dips in revenue, delays in cash flow, or cost overruns.  Additionally, net profit margins are nearly always less than outsiders believe they are.  As a result of those different elements, survival and long term success requires tight control over each, and unfortunately, they are not always within the control of the owner.

In our current situation, the lack of control has never been greater or more universally impactful on all businesses.  Covid-19 has forced Governors across the United States to mandate businesses shut down, at least temporarily, and no one knows when the opportunity will come to unlock the doors and welcome your employees (and customers) back.  In addition, depending on how your customers and suppliers are impacted during this time, you really have no idea at this point what you will face when you do restart your business.

Based on my own personal experiences over the years, which is a more positive way of saying the long list of bad decisions I have made in business, there are some things I would strongly encourage other business owners to consider at this time.  Of course, every situation is different, and these may not all apply to you and your business, but it doesn’t hurt to think about them to make sure you are giving your business the best chance to survive this health emergency, and subsequent economic crisis.

Natural Instincts

While there are certainly plenty of business owners out there who operate like Mr. Potter, I like to think that far more are more like George Bailey (and if you don’t get the reference, just stop reading and go watch one of the all-time classics).  What I mean by that is most small business owners I have encountered want to do what they can to treat both customers and employees the right way, and often see employees as a part of their extended family.  The problem is that when faced with difficult circumstances, that same well-intentioned business owner will frequently make bad decisions that not only put their own well-being in jeopardy, but actually harm the employees they are trying to help in the long run because the business ultimately fails as a result of those decisions.

I have been reading local stories in the past few days that illustrate one of these tendencies.  There are a variety of local business owners that have already begun tapping into personal savings, like their 401(k) accounts, or taking out personal loans to cover payroll (and other expenses) while they are not operating to make sure their employees are still receiving the paycheck they need to survive.  Honestly, it’s heartbreaking to see, but I have been there myself having taken out crazy interest rate loans to float payroll and even borrowing cash from a parent to cover a week here or there, while not paying myself or skipping other expense payments because I felt like those companies could afford to wait  little longer.  I have also paid employees the net amount of their check, and not had anything left for withholdings, and spent years afterwards paying for those withholdings (with interest and penalties) all because customers chose not to pay in full for work and product we had already provided.

Here’s the thing, the natural instinct to take care of employees can be crippling long term.  I’m not suggesting you should not do it if possible, but you need to tread very carefully, and make sure that you are not setting yourself or the business up for long term economic failure.  This was one of the inherent problems with the latest economic stimulus package as originally proposed by Senate Republicans, in which they were planning to extend loans to small and medium sized businesses.

The Problem With Loans

I had previously written a full article covering this subject, and if you want to read it, you can click the link below, but I will summarize it here.

Why Loans Will Not Help Small Businesses During Covid-19

Loans, as a tool for small businesses, are not necessarily a bad thing, however it really matters what you intend to use them for and the terms of the loan itself.  The first thing to consider is what you are using it for.  Often, there are two situations where using a loan makes perfect business sense.

Start Up Costs and Expansion: 

These include term loans that may be needed to acquire equipment, for example when a business is starting out or trying to expand to meet demand.  With these, you can usually find a loan that includes reasonable interest rates, they can use the equipment being acquired as collateral, they conserve your cash resources you will likely need for other things, and they offer a fixed monthly payment that you can build into your business plan.  In more creative business plans, they can be used to provide a cash reserve that may be used going forward in place of a line of credit, but this is a little risky because they will likely require the owner to put of something else of value as collateral, including their own home, or other assets like stocks and bonds.

Maintaining Cash Flow:

With a lot of businesses, you are frequently expected to essentially front the cost of materials and labor, as well as cover fixed costs like rent, while you produce whatever product your company makes or provide whatever service you provide, and especially in a business focused on B2B sales, you are almost automatically expected to extend terms to your customers, meaning you will not get paid for your work until as much as 30, 60 or even 90 days after you have completed and delivered your goods or services.  As long as you have a sufficient line of credit loan, or some other means of floating your expenses, while you wait for payment AND, more importantly, you both build the cost of this credit into your margins and have a high level of confidence your client will in fact pay you, then floating this cash flow delay with credit of some sort makes sense.

Fatal Mistake:

The thing that you need to think about when it comes to your business is what your revenue is tied to because in most businesses, revenue is directly tied to “time”.  By that I mean that whatever your business does, you have a finite amount of capacity, and your sweet spot is one in which you are running a full capacity consistently, because downturns mean you are paying expenses for capacity that goes unused, and the cost per unit of whatever you produce goes up (and profit goes down).  And on the flipside, having more work in a time period than you have capacity will also increase your costs because now you are looking at higher variable costs (employees on overtime wages versus straight time) or worst of all, you slip in terms of delivery, quality and customer service…all which commonly lead to delayed payment (increased credit costs), short pays (decreased revenue simultaneously as increased expenses) and lost future revenue from unhappy customers going elsewhere.

All of that is what a business faces under normal circumstance.  Covid-19 is a completely different animal and you need to adjust your thinking accordingly.  What we are dealing with now is a complete stoppage of revenue for many businesses, and of equal importance, time is not slowing down (in spite of what it feels like when you are sitting in your home, unable to do all of your normal activities).  Trust me though, for business owners, they hear those minutes, hours and days with no activity so loudly, 24/7, it is as if the pendulum on the clock is banging directly on their forehead.

The lesson here is this:  During this time of mandatory shutdown for non-essential businesses, most will NEVER be able to make up for this lost time, meaning every dime of expense incurred will need to be paid for out of future profits, and you need to decide NOW if your business model will support that.

It’s also important to consider that no one knows at this time how long this stoppage of revenue will continue, nor how fast that revenue will return to normal levels once we all do get back to work, so it is risky at best to look toward loans of any kind to float this period of time, and therefore, I personally believe that taking on debt to cover these expenses is quite likely a mistake.

What Should You Do?

Start with answering the question of shut down or simply slow down.  Personally, I believe that attempting to partially operate can be more expensive in the long run, and therefore more damaging to your future than just completely shutting down, but look at your own situation and make that decision.

An example I think of were this is likely applicable is for a restaurant or bar, where you normally serves customers on site.  Most local rules allow you to continue selling meals for take out, but to provide those, you are most likely incurring nearly your full operating costs, while seeing dramatically reduced revenue.

Now, let’s assume you have concluded a total shutdown is the path you should go down, and, for the sake of argument, you have access to cash that may be used to cover expenses during this time because that means you at least have a choice in how you proceed.  This could include loans, lines of credit, personal credit cards (though it is hard to pay rent or payroll with credit cards) or even your own business or personal cash reserves.  On the flipside, if you do not have access to the necessary cash, and only operate on the cash flow of your business, you have a series of much harder decisions to make, including permanent closure (and the sooner the better if you plan to live to fight another day).

If you have the means and intention to ride this out, here are the things you need to do before you spend any of your available cash:

Step 1:  Immediately reduce and defer as much of your fixed costs as possible!

NOTE:  Assess which of these expenses you have a personal guarantees on, because that impacts how much leverage you have in negotiating temporary reductions and should shape your approach to each.

  1. For rent or mortgage payments, contact your lender or landlord and ask them to defer your monthly payments to them, and negotiate to have them added on to the end of your mortgage or lease.  In other words, if you have 18 months left on your lease, or 10 years left on your mortgage, request that the length of each be extended by one month for each month you need to be shut down, and maybe even build in an extra month or two to cover ramping your business back up once you do restart if possible.  In many cases the lender or landlord will be willing to work with you because the alternative of you going out of business is much more harmful to them.
  2. With leases especially, they often include charges for common area maintenance, some of your utilities, and property taxes.  Try to see if the landlord will waive permanently common area maintenance charges for the months you are not operating since you will not be making a mess that requires janitorial, etc. and realistically, if you get charged a portion of things like landscaping and snow removal, the landlord will have those expenses, whether you are there or not.  As for utilities included in your lease, you can ask to have them permanently waived as well, but at a minimum, ask to only pay actual expenses tied directly to your usage, because actual utility bills while you are shut down will likely be far less than what they are when you are under full operations, and the amount the landlord normally collects from you is likely and average monthly cost of your usage during those times.  Property taxes are a tougher nut to crack because your landlord likely has the same property tax bill regardless of whether you are operating or not, but that does not mean you should not ask to defer them in some way.  You should check to see if your local municipality or state has offered any special programs because of the Covid-19 situation, and if so, make sure your landlord is passing those benefits along to you.  You can also ask your landlord to allow you to not pay them during the months of shut down and amortize the accrued debt over the remaining months of your lease, or the remaining months of the tax year once you get restarted.  For this, keep in mind that the landlord does not pay property taxes monthly, but rather annually or at most bi-annually, so it may not hurt them at all to allow you to delay their payment, and it conserves the amount of cash you have to deal with other expenses.
  3. For other utilities you pay directly, talk to each provider and ask to defer payments, or enter into a payment plan to make up for unpaid utilities once you restart your business.  I am already seeing many special offers being extended by utility companies during this time, so find out what they are and take advantage.  As an alternative, see which utilities you can have turned off during this period.  If you are not working, do you need Internet service, or phone service?  Can you have your business phone service turned off, and the number forwarded to your cell phone temporarily?  Do you need water if you are not there to use the restrooms and sinks?  Very likely, you only truly need electric and or gas to maintain at least an above freezing temperature, depending on your climate, but otherwise, since these are tied directly to consumption, turn off EVERYTHING, unplug everything, set thermostats to 40 degrees, and lock the doors.  Don’t rack up bills any larger than you absolutely must.
  4. Businesses carry many different kinds of insurance depending on what your company does.  Review all of your policies with your insurance agent and determine which coverages can be dropped temporarily.  Look specifically at things like insurance on equipment or company vehicles that are not being driven.  Likely, your insurance policy includes coverages on small things like computers or hand tools, or even larger equipment.  If you have a large piece of equipment financed, you may be required to maintain coverage, but otherwise, if all of your assets are locked up inside your building, and no one is using them, there is little to know chance of anything happening to them, so you may be safe in dropping the coverage.  If you are leasing a space, you are likely required by the terms of your lease to maintain insurance on the building you occupy.  The thing is, your landlord also has coverage on the same thing.  Talk to your landlord and ask permission to drop your building coverage while you are not using the space.  You pose no risk to the property if you are not there and working, so hopefully, your landlord will allow this.  Liability insurance is a HUGE one for many companies, including professional liability.  If you are not working, there really isn’t anything you can be liable for, so look to drop this coverage until you get started again.
  5. Contact your lenders if you have any lines of credit or term loans on assets or for inventory.  Ask to defer missed payments to the end of the term loan, extending its length (and be sure to ask for no negative credit reporting and no penalty).  Interest will most likely continue to accrue, but that is not a huge hit, but you can ask for favorable treatment on this too.
  6. Supplier lines of credit are frequently used for everything from office supplies to raw materials, so talk to each that you have a balance with.  First ask if they will defer payments completely without interest or penalty, but if not, look into returning unused supplies or raw materials for credit against outstanding invoices.  Most stock items can be returned, though you need to be sure to weigh the benefits of doing this against any potential restocking charges, handling fees or freight costs that may reduce the amount of credit received.  It will still likely be worthwhile to do, but you need to at least be aware of these hidden costs before making a decision.
  7. Subscription services and fees can often be eliminated temporarily by suspending services, with the likely exception of things like cloud based accounting software, but you can certainly ask about those as well.  Definitely suspend services on things like coffee and vending, janitorial, trash pickup, shredding services, employee uniform services, walk off mat exchanges and the like.

By taking these steps, and making sure you look at your own situation for anything I have missed, you may be able to eliminate virtually all of your fixed costs for the time you are shut down and not saddle yourself with needless financial burden once you get restarted.

Step 2:  Look at your variable costs!

By their very nature, variable costs are directly tied to the cost of your product or service, so if you are not producing anything, these can most likely just disappear simply by ceasing operations, but they also likely include some very emotional decisions, especially in small companies where the natural tendency for most owners is to worry about their employees well being, and their income is certainly a part of that.

For the purposes of this article, I am going to just make the assumption that non-payroll variable costs will disappear when you pause your operations, so I will not address these.  Besides, I imagine that in nearly every instance, these costs being eliminated will not harm your future business prospects, your credit or cash, nor cause you to lose sleep at night.  That leaves us with the costs related to employees, including obviously wages, but also benefits, worker’s compensation insurance, etc.

When it comes to payroll, you first need to decide what you want to do, and weigh the costs of that compared to your other options.  The spectrum of choices for all businesses will range from maintaining the status quo while not having any work for the employees to do, all the way down to laying everyone off and eliminating the cost all together.  Subsequently, there are a lot of factors you need to weigh in deciding what path you want to go down.

Think long and hard about how valuable each individual employee is to your business, and what they cost you.  This sounds cold, but your first priority has to be the survival of the business, because without that EVERY employee will be hurt and no matter how good your intentions, it may simply not be possible to make sure they are all okay through this.  Things to consider:

    • How specialized their skill set is and how critical it is to your continued operations.
    • How appropriate their wage is compared to the skills and talent they provide.
    • How hard they would be to replace after the shutdown is over.
    • Have they consistently met or exceeded your expectations in areas such as work quality, effort, attendance, attitude, etc.
    • Do you consider the individual to be a valuable part of your long term future.
    • Is their role one that will be even more valuable once you do restart in those first days back to work (for example, maybe you need sales people to generate business before you need people to produce things that have been sold).
    • How well will they manage if you are forced to lay them off (though this is more of an emotional question than a business question, and it could lead to bad decisions).

Now that you have though through each employee and their position, determine what you can afford and what will not cripple your future chances for success, keeping in mind that these two numbers are likely NOT the same.  Regardless of what those numbers are though, we need to all work to minimize the cost while implementing the solution that is best for our businesses.

    • Keep in mind additional resources that may be available to you and/or the employee(s).  These include things like the grants that were negotiated into the current proposed legislation by Democrats (as opposed to the small business loans originally proposed by Republicans), and the individual cash payments being made as a part of that same legislation.
    • My belief is that these times call for using all available resources, and doing your best to see that employees have the resources to survive this time and not necessarily making sure they receive 100% of what they are accustomed to.
    • There could be a big difference between what they want and what they need.
    • Prepare to sit down with each employee, including doing your homework on learning the details of programs they may be able to access to assist them through this time, and be honest with each about the circumstances (what you want to do, what you can do, and how you see this playing out).

Ways to minimize employee costs:

  1. Talk to each, and hopefully, honestly, about what they NEED.
  2. Determine what government programs are available to them to help accrue the total that they need.
  3. Determine what government assistance is available to you to help with the costs of retaining employees, and be sure you know the requirements to qualify.  Early word on the latest legislation being voted on is that grants are dependent upon you keeping employees on the payroll, but determine if that means at full wages, and if it means all employees or if it can be on a case by case basis.
  4. Talk to your worker’s compensation carrier and determine if there is a way to provide them with some income while they are effectively laid off without having to count it in the worker’s compensation audits you will face down the road as that can be as high as 10% or more of wages for normal payroll depending on what type of work the individual does.
    • Frequently, severance or dismissal payments are NOT counted toward work comp calculations, so confirm if there is a way to provide income while they are not working that can be legally classified under this heading.
    • Also, make sure that however you classify payments while employees are laid off, you also know how it impacts their ability to collect unemployment or how it impacts benefits you provide like health insurance.
    • Determine how classifying their compensation during this time impacts your qualifications for government grants.
  5. Be sure to recognize that health insurance coverage is absolutely essential now more than ever.  If you provide some form of employer subsidized health insurance to your employees, do everything you can to ensure they maintain continuous coverage during this time.  If you are forced to lay people off or furlough them, but intend to bring them back once the shutdown is over, this is especially critical.
    • One option you can explore is to possibly convert them over to the Affordable Care Act’s Marketplace options.  Loss of employment is a valid reason in nearly every instance to allow for enrollment outside of the normal open enrollment period.  This cost may be less expensive than what your current group plan costs between the employee and employer contributions combined.  If you do this, you could potentially offer them severance or termination pay sufficient to cover this premium cost, but be sure to fully understand all of the associated costs, including restarting annual deductibles for people that have already met that amount and also potential gaps in coverage, and be aware of possible Cobra options to span these gaps.
    • Transitioning employees over to ACA plans during this time could be better for both you and the employee in the long term because it eliminates that uniquely American problem of people’s healthcare being tied to their employment and it could potentially reduce the costs to both employer and employee long term.  Hopefully, one day we will have a national single payer health insurance program and this will not be an issue, but for now, you do need to figure out what the options are.
    • Even if you cannot bring them back, the biggest thing you can probably offer is enough of a severance package to cover the costs of their health insurance while they are unemployed as Cobra coverage is likely unaffordable to them, and the bottom line is that you could quite literally be saving someone’s life.
  6. Do NOT forget withholdings.  There is some talk about FICA payments being postponed, and other temporary adjustments to payroll taxes, but make sure you are certain to figure out what you are obligated to collect, and will owe, either now or in the future, and if that total, added to what you provide to the employees as gross or net pay, is covered, even if that means reducing the amount of net pay they receive.  Barring any temporary changes, withholdings are non-negotiable, and whether you collect them from employees or not, your business, and you personally, WILL be held responsible for them, including late payment penalties and interest.  Even declaring business or personal bankruptcy will not erase this debt, so be careful as you proceed.

Once you have worked through all of these issues with your employees, make a final determination as to what you can afford to both take care of their essential needs, and preserve your own business’s future.  If you do your homework, and make sure you fully understand all of the various programs available right now, you should be able to successfully navigate this unprecedented period in our nation’s history.

Just remember, we are all part of the same economic system, from the Federal government down to the lowest level employee you have, and the key to preserving our economy will be for everyone in that chain to work together to make sure we all come out the other side of this whole, and ready to get back to work.

For business owners, you will be forced to make difficult decisions made even more challenging because of the vast number of unknowns.  For now, you really have three basic things to consider if you are not operating an essential business:

  1. How can you position your company and yourself to survive this time and return to success in the future.
  2. How can you best help your employees get through this time.
  3. What can you do to support the changing needs of the community, including quite possibly, just making it possible for people to just stay home and having a job to return to when this is over.




























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