How to Streamline Expenses to Preserve Cash and Strengthen Your Financial Position

As the Coronavirus disease 2019 (COVID-19) pandemic continues to spread, many companies are finding themselves in the tough position of making budget cuts to sustain their business and pausing growth.

These decisions are crucial to the future of your business, especially for small businesses and those in the hardest hit industries that found their revenue streams greatly impacted overnight. 

In this tactical step-by-step guide for finance and operations leaders, we’ll navigate how to preserve cash and strengthen your financial position during these uncertain times. This guide caters examples to small and early stage businesses that have suddenly found themselves impacted by COVID-19, but the foundational principles are applicable for businesses of all sizes.

Audit Your Financial Position

  • Run a few scenarios
  • Identify the most likely scenario
  • Pause high-cost projects, if needed
  • First, work with your finance team to create a few scenarios for your business. If your company’s revenues were to drop by various percentages, how long can your company survive? This should be an honest assessment to provide insight and forecasting for various scenarios, including the worst case scenario. 

    What does the future look like if your revenues were to drop by 50%? How about 75%? Even consider 90-100%. 

    This seems dramatic but due to stay-at-home and shelter-in-place orders it is unfortunately a reality for some companies. The travel industry and companies in the service industry such as food services, restaurants, salons, gyms, and fitness studios are particularly hard hit right now. To get a proper view of the impact, you may want to make some assumptions, like the crisis may take 6 months or longer for business to “return to normal.” Walking through these various scenarios will help empower your business to make plans and decisions or decide that there is enough runway time to put a decision off.

    As you do this exercise, think through the most likely scenario for your particular business and industry. If your most likely scenario doesn’t look very promising, put an immediate pause on any growth or high-cost projects that may be not feasible. This could include team offsites, hiring for new positions, office expansions, or even geographic market expansion plans.

    Review Your Business Expenses

  • List of last year's expenses
  • Label categories as variable or fixed
  • Label categories as discretionary or mission-critical
  • After auditing your financial position and getting a sense of the most likely scenario for your business, it’s time to review your business expenses. This exercise should be simple if your company has an expense policy and some processes in place for expense tracking. 

    To get started, create a list of all company expenses in the last year. Make sure expenses are categorized based on the type of expense. Your categories may include software, marketing, employee meals, and more. 

    Go through the list and decide whether each expense category is fixed or variable. In a nutshell, is the expense a fixed amount that is paid every month? Second, determine whether each expense category is discretionary or mission-critical. Mission-critical expenses are necessary to keep your business running. For example, this could be the cost of supplies if you are making physical goods, or server costs if you are a software company. Discretionary spend, on the other hand, could be considered perks for the company such as parking or commuting stipends.

    Cut Back Variable Costs and Non-Essential Spend

  • Trim marketing spend
  • Review software contracts
  • Evaluate contractor work
  • Review compensation
  • The quickest way to preserve cash is to cut back variable costs and non-essential spend. General categories that are easier to trim include marketing, public relations, software vendors, and external contractors. 

    Let’s start with marketing and PR spend. This can usually be trimmed down very quickly since much of the spend is likely to be related to digital campaign budgets such as SEO content development, paid search engine marketing, social media advertising, or display advertising. In some cases, if your business is in high growth mode, cutting back your marketing spend can be substantial for cash preservation.

    For software vendors, ask yourself if you’re going to be able to fully utilize your software contracts? For example, if you’ve paused hiring, do you still need recruiting software? If you’re not moving forward with some new product features, are there some partner contracts that you can shave back on? Review the contracts carefully to understand cancellation terms, and work closely with your partner vendors to renegotiate terms that are more applicable and sustainable to your business. You should find that most partners are very willing to help. You can also check for force majeure clauses. These are basically provisions that may alleviate your payment obligations in extreme circumstances where, due to completely unforeseeable acts of God or man, one or both parties are unable to fulfill their obligations.

    Lastly, are there any external contractors that you may be able to scale down? This could look like decreasing their hours, shortening your contract with them, or in the worst case, terminating the contract early. This could apply to marketing consultants or engineering contractors working on projects that are no longer priorities for the company

    In extreme cases, when taking measures to cut back all the discretionary spend is not sufficient, more painful and deeper cuts like a salary or headcount reduction may be necessary. First, see if a salary cut can help preserve jobs. The U.S. government has passed laws recently through the CARES Act that will provide forgivable loans to small businesses that retain their workers, and you should have discussions with your investors to see if additional funds are a possibility for you at this time to prevent these drastic cuts. In the unfortunate event that some reduction in headcount is necessary, work closely with HR to see how you can best ease the transition for your loyal employees.

    Make a Plan for Fixed Costs

  • Know options for office lease
  • Try to get month to month term
  • Seek rent abatement
  • An office lease is often one of the more expensive and “fixed” expense items. If you have just a few months left on your lease, try to work with your landlord to see if there is an option for rent adjustment or early termination. And see if a short-term work from home option is something you can support across your whole team. 

    If you are about to sign a multi-year lease, unless you are very confident in your business projections, defer the negotiation or try to move to a more flexible term such as a shorter lease term or even a month to month agreement. Few tenants will be seeking to enter long leases, so landlords might be more amenable to negotiations, especially if you are a long-time responsible tenant.

    Some landlords are proactively offering to defer rent payments. Check your lease carefully and see if you can defer payments or seek rent abatement, especially if you are a non-essential business in one of the many American cities that have been impacted by a shelter-in-place, stay at home, or quarantine order, effectively banning your company from physically going into work.

    Best Practices for the Future

    Moving forward, make sure to track business expenses carefully and enforce that discipline across the entire company. To help with tracking spend and ensuring all employees are being mindful during these uncertain times, utilize a user-friendly expense management solution like TravelBank to ensure all expenses are being captured in an accurate and timely manner. Ultimately, these adjustments and processes that you build today will help your business be more efficient in the future.

    Find the Expense Solution Your Business Needs

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