As we mentioned in our last email that cost optimization is critical at this time. This is the time to be frugal. Remove all the flab and be lean and efficient. Focus on your core business. Bad costs (unnecessary spending, bad performers, traditional working methods, non-core operations, etc) need to be ruthlessly eliminated. We also discussed some ways to mitigate costs.

This brings us to our next topic of managing your supply chain. Re-evaluate them. The objective of this exercise is to find this:

• Are your suppliers weak: Would your suppliers be able to handle this situation? Would they be able to supply material to you when the lock down lifts and later? If not, what are your other options? Also, can you support them in any way?
• Are your suppliers strong:  If yes, can they extend better credit terms or lower prices to you? Can they help you out in any other way?

How to approach:

1. Identify critical vendors: You should identify and evaluate two kind of suppliers.
   • One from whom you purchase a significant amount of goods/service
   • The other from whom you purchase any critical goods/services, which is not easily replaceable
2. Communicate: This is crucial. Have frank and open conversations with your suppliers. Try to find a middle ground with your suppliers, so that the burden can be shared justly. Communicating will also give you a pulse on their financial and operational situation also. This will help you plan your operations.
3. Create backup: Even if your suppliers are strong, it will be useful to have some backup options in case they are not able to deliver. We are living in very uncertain times, and unexpected should be expected. Have a few standby options for important supplies.
4. Financial evaluation:
   1. Financial growth and margins:
      1. Check growth/decline in operating revenues of your suppliers in the last two financial years. Were they growing or slowing down? This will give you an idea of their business, pre-corona stage.
      2. Compare their revenues and profit margins (EBITDA and PAT) with other similar companies in the industry. This will give you a pulse on the company situation vis-à-vis industry. Was the company doing better or worse than the industry? This will directly tell you whether you can depend on the supplier or not.
   2. Other business interests: Check if your supplier has other businesses or has directorships in other companies. Multiple business interests means less focus on one business. And focus is crucial currently. You can find this information for free from Tofler’s website or Tofler Company 360 product. Just find your supplier business on Tofler and explore its company network there.
   3. Days receivables outstanding ratio: This ratio indicates average number of days in which a company receives its payments from its clients. For example, if your supplier has days receivables outstanding of 45 days, then that’s the average time in which it expects the payment from its clients. You should check this ratio for your suppliers. Then look at the days in which you make payment to your suppliers. Is that less than their ‘days receivables outstanding’? Perhaps, you can negotiate better credit terms or lower prices in that case.
   4. Are you a big client to your supplier:  Some of you would just know. For others, who are not sure about this – compare the size of your contact with your supplier’s last year operating revenues? Is it a significant part of his revenue? Basically, are you an important enough client for him? He might then be willing to negotiate more on the payment terms and prices, at least, for a short time.

How to find this information:
You can download financials of your suppliers and its peer companies from MCA and compare their revenues and profits. You can calculate their profit margins and receivables ratios from the financial numbers. Or you can also use financial reports or Tofler Company360 product which provides all such information on your supplier with pre calculated profit margins and important ratios. Currently, you will get financials for March 2019. However, they can still be put to good use.

In our next blog, we will share insights provided by CEOs of biggest Indian companies on business outlook and expected economic changes.

Besides, please find links to our previous writeups related to COVID-19:
How can businesses deal with economic impact of COVID-19
Addressing issue of salary expenses in the COVID-19 situation
How to optimise costs for better cash management under COVID-19 situation

Our Prime Minister has announced extension of the lock-down until 3^rd May. The government will start allowing some activities from 20^th April, in the areas which are virus safe and have no cases. Experts believe that lockdowns will start getting relaxed and gradually allow more activity. However, we all will have to be cautious before vaccine/medicine is invented. Therefore, subdued activity may continue for at least a year. Consequently, demand for most of the goods and services will stay at reduced levels.

This is a time when taking a hard look at your costs is critical. Generally, cost optimization takes a back seat when the focus is on growing the business. However, I believe, for most of us, the focus will shift to survival of business before we look forward to growth again. In fact, optimizing costs right now will strengthen your chances to capture disproportionate growth and market later when the crisis is over. A gap left open by failure of inefficient businesses will need to be filled by efficient and strong businesses. You must prepare your business right now for the opportunities that will arise later. In fact, after the 1918 Spanish flu, the world experienced one of the biggest spurts of economic growth. It started in 1920 and continued until 1929.

Therefore, in this writeup we are discussing the need to review all your costs and try to reduce them as much as you can.

Begin with writing down your sources of costs – Cost of goods, rent, interest, salaries, power and fuel, printing and stationery, freight, legal and consulting costs, advertising and marketing, travelling and conveyance, leases, AMCs and others.

Categorise them into significant and non-significant ones for your business. You can also classify them into fixed / variable costs or direct / indirect costs. Whichever way it makes more sense to you and your business. Now look at the significant costs. Can they be reduced or optimized? For example:

1. Rent costs: This is one of the most significant cost for most of us. Businesses all over are questioning their rent costs and are trying to re-negotiate them. Start by looking at your agreement. Does it mention about any relief during unforeseen circumstances? Look at a ‘Force Majeure’ clause in your agreement. It is generally placed towards the end of it. Of course we are not suggesting you to get into legal battle with your landlord. Just be aware that if there is any such clause in the agreement, it will help in negotiation. Otherwise, depending on your relationship with him, you can try to negotiate other arrangements:
   1. Simple rent cuts: I am sure most of you would have already attempted it or have thought about it. Depending on the financial position of the land owner and your relationship with him, a rent cut can be negotiated for some months.
   2. Providing incentives for significant rent cuts: Like in case of salaries, you can brainstorm an arrangement to provide incentives to landowner later in lieu of significant rent cuts right now. For example – reducing rent right now and providing a share in the revenue/profits when business reaches pre-corona scale. We know a couple of businesses who have entered in such kind of arrangement. Or allow for higher escalation in the rent when the business reaches pre-corona scale, for reduced rent right now.
   3. Other options:
      1. Shifting to co-work spaces: You may also take a look at co-work spaces for your staff. These offices charge you by the number of seats your team occupies. If you expect your team to get smaller, then you may consider shifting your office in co-work spaces. They might turn out to be cheaper.
      2. Exploring work from home: Another option is exploring ‘work from home’ option for your team even after the lock-down is lifted. That is if your business can afford. You will have to invest in laptops and internet bandwidth at employee’s place. You will need your team to adept to certain online tools for video conferencing, transferring files and documents, communicating regularly in teams, managing workflow, etc. Its only about figuring them out once. The whole team may physically meet once or twice a week for face to face discussions. This meeting can be done anywhere depending on size of your team – conference halls, someone’s house, café’s, co-work spaces, etc.

Similarly, review your other expenses. Like:

1. You may consider reducing your advertising and marketing budgets for a short time.
2. Reduce your travelling expenses even after the lock-down lifts. You may want to meet your most important business partners for a face to face discussion. But for others, try to do meetings through video calls as much as possible. The whole world is getting used to video calls for meetings. You might also benefit by it.
3. Software development expenses: If you were getting a custom MIS built for your team, then perhaps it is a good time to look at ready options available in the market. They may turn out to be cheaper than custom development. For example, there are various applications for Indian SMEs now that you can try for free. Like for customer service, payment gateways, sales monitoring, payroll processing, attendance monitoring, workflow management, team management, etc.

We have already discussed in our previous writeup, how salaries costs could be reduced, if required. Brainstorm, how other costs can be reduced? Talk to your vendors. Perhaps they have entered some cost reduction arrangement with others that you can also consider. Eliminate any expense if it can be dispensed off.

At this stage, for your significant costs, it might also be a good idea to look at your vendor’s financials. We will cover the need of doing that in our next writeup and how that information can be used.

As we mentioned to you in my previous mail, we are looking into ways to deal with the economic impact of the COVID-19 lock-down. The first question we are addressing is:

How to deal with salary expenses? Should we lay off employees until the situation becomes clearer and commercial activity resumes?

We are researching how businesses (big and small) are addressing this issue across the world. We are also looking at how businesses dealt with such issue in the past. After all, this is not the first time that any business has faced this situation. Businesses have coped with the 1918 Spanish flu, world wars, industry destructions, natural calamities, etc. There are businesses that are more than 100 years old (Shinese businesses of Japan) and have seen and survived all kinds of situations, including those like this one.

The short answer is: Do not lay off your employees unless absolutely desperate.

Basically, it is the last action you take if you are forced to. These are the times which give you an opportunity to build employee loyalty. They will then stay with you through thick and thin. They will be the support that you will need once the activity resumes. This situation will get over sooner or later. What will remain with you is your employees to resume the business later.

Another practical reason for not laying off employees at this time: currently, a lot of daily wage workers, labor and unskilled people have gone back to their villages amid the lock down. Experts feel that when the lock down ends, not all of them will come back to cities. A big percentage of people who were considering returning to their villages permanently pre-corona, may decide not to come back at all. Or they could simply stay back for longer. This will lead to acute blue-collar staff shortage once the lockdown is lifted. At that time, it will be difficult for you to arrange for employees. And if you don’t stand by your current employees, they won’t be loyal towards you anyways. Therefore, helping them right now might help you in a big way later.

However, I know it is easier said than done. And for some businesses, the situation could get desperate. In such a case, you know what’s best. But if you can, keep your employees.

Of course, you can try to negotiate salary arrangements with your employees. Here are some ideas:

1. Categorize your employees according to their financial needs: You would have employees at all levels. Some would be affluent enough to take significant salary cuts for some time. Some could afford lower salary cut and some couldn’t. Depending on your situation, you may talk to them about the required cuts at appropriate time. Its better than laying off employees.

2. Giving incentives in return for accepting salary cuts: If you have highly skilled people in your employment, then you can offer them incentives later so that they accept significant salary cuts now. Incentives like:

a. Sharing a percentage of profits over and above the salary once the business revenues / profits reach pre-Corona stage.

b. Arranging to pay lumpsum amount equivalent (plus more) to total salary cut when business reaches pre-corona stage. This will reduce uncertainty for you and lower your fixed salary expenses now.

3. Communicate with employees: It will reduce panic and fear in your employees and mentally prepare them for what to expect:

a. Communicate that there could be salary cuts if this situation persists. If you will keep communicating, they will understand your situation and be financially prepared to deal with it.

b. Tell them to be very cautious in their spending even after the lock down is lifted. They should restrict to spending only on essentials. Unless we have vaccines and medicines for Corona, we could be hit by second and third waves of the virus (as happened earlier in the case of the Spanish flu in 1918). Every penny saved now will be helpful at that time. It will also give you space for salary cuts, etc later, in case it is required.

4. Trainings: The handling of 1997 Asian crisis by automobile manufacturer Toyota, where it incurred losses for four straight years, is exemplary here. When all other companies in Japan resorted to cutting costs by laying off employees, Toyota’s leadership decided to cut all costs except laying off employees. They instead used these four years to train and improve skills of their employees in their work areas. This resulted in Toyota coming out of the crisis much stronger than before and with the highest employee loyalty. They were able to grow much faster and efficiently once the crisis was over.

Similarly, while your employees are at home, you can ask them to undertake digital trainings, which can be helpful in your business. For example:

a. Language skills: Employees can focus on their English speaking and writing. Or if you have an import/export market, then you may want your employees to pick up basics of the relevant foreign language.

b. Digital marketing: They could explore ways to increase the online presence of your business and can take online trainings on digital marketing and social media management.

c. Process development: The respective division heads of your business can work on establishing and improving the existing processes in their divisions. Process development always takes a back seat when the business is actively running. This is a good time to focus on that.

d. You can also identify useful online videos and courses for your employees that would be relevant to your business and ask them to undertake them.

It would be great to hear how you are handling this situation? Are there specific courses that you have asked them to do? For example, have you identified online training courses useful to factory workers, sales representatives, floor staff, accounts staff, etc. Or have you entered specific salary cut arrangements with incentives later? We would like to hear about them and share them with others.

Please keep sharing your feedback with us.

Besides, we are glad to receive an overwhelming response to the last email. Business owners have asked us a variety of questions including identifying opportunities in this situation. Like – how will industry change, is it a good time to expand for efficient businesses, fresh business opportunities, procedural changes required, getting loan without collateral, reducing rent expenses, etc. We will deal with all these questions and more that we get from you in our future writeups.

We are writing this article to help small and medium sized businesses like us to deal with the adverse economic effects of COVID-19 situation. As we all realize, we are living in vulnerable and uncertain times. The 21-day nationwide lockdown is unprecedented in our history. There is already an anticipation that it could be extended. Our Prime Minister has also asked states to prepare for a longer partial lock down state.

The adverse economic effects of this situation would naturally extend in the future. Their gravity and duration are somethings that we all will have to wait and see.

To help SMEs, we have decided to research on the actions we could possibly take to deal with the economic impact of this situation. We do not have answers to all the questions ourselves. But we are listening to inputs from industry experts and consultants across the world. We are brainstorming on how they could be applied to SMEs. We will keep sharing these with you to prepare for what might come.

Broadly, this situation may pan out in two possible ways:

Scenario 1: This paints a picture where damage to the economic cycle is short term. The lockdowns are effective, and the spread of the virus is contained to safe levels. The restrictions are lifted as scheduled, and the economies gradually return to normalcy. Caution would still be required but business activity will start to spring back. This will happen across the world and international trade etc will be restored to earlier order.  In such scenario, global economic impact should be short term and normal situation should restore in about 5 – 7 months. This can be seen happening in China and South Korea.

Scenario 2: The second scenario paints a gloomier picture and expect the situation worsening. The lockdowns might continue for longer, or there is an extended period of significantly reduced commercial activity. This will dramatically impact the consumption and demand of goods and services in the country and for longer time. Offices and factories will keep operating at much reduced scale. With zero or very low revenues, businesses will find it hard to continue to pay employees, service debt and pay rents, etc. It will start having its ripple effects too. The working capital would be stuck in businesses. Interest costs will accumulate. A natural consequence could be bad debts, unemployment and management challenges of inventory, cash etc. The recession in this case could extend to 2-3 years.

The above would seem scary. Honestly, I think that India is more likely to experience Scenario 1 because of the strict lockdown implemented. Countries like USA and Italy could go through Scenario 2 which will affect the world trade. This will impact the export driven businesses like IT, BPO/KPOs, goods export businesses and others. The Indian domestic businesses will do better. However, in any case, the subdued activity will continue for some time atleast.

In such situations, the common questions and concerns for businesses like us that need to be addressed are:

1. How to deal with fixed salary expenses if the business operates at lower output for extended time?
2. How to deal with other fixed expenses like building rent, leased machines, interest cost, etc?
3. What to do with the inventory lying ideal in the warehouses? What about raw materials and work in progress?
4. How to address the near-term cash management challenges?
5. How to increase the resilience and strength of your business to survive through this?
6. How to return your business to scale when the normal order is restored?

And more….