The COVID-19 pandemic has created one of the most challenging environments since the 2008 recession and it has tested many businesses. Some are trying to survive, while others have found new opportunities by making changes to their business model. Some have found increased demand for their products or services because of the industry they serve.
Businesses may be significantly impacted during this time. They may face changes in revenue levels and revenue streams, staffing levels that do not correspond to the current environment, cash flow reductions due to slow paying customers, or supply chain disruptions. Revenues may not be on par with normal business levels, and of course, operating expenses will be reflective of adjustments needed to conserve cash flows, preserve net income, or reduce losses. Some businesses have maintained higher employee levels than the company’s revenues support due to cash infusion from the Paycheck Protection Program (PPP) and in order to receive loan forgiveness. Eventual PPP loan forgiveness will further distort a company’s financial statements when it is recognized as other income. These along with other factors make it difficult to have meaningful financial information to assist owners in managing their business.
So how does a business measure performance during an unusual time when significant impacts have occurred in a short timeframe? Below are four steps that businesses can take to improve performance measurement.
- Provide weekly cash flow reports. Providing published cash flow reports to the executive/management team helps everyone understand the sources and uses of cash. This report should reflect weekly comparisons during the chosen time period, and if available, should include the prior year cash flow information as well. This will give management a better understanding of where the company stands with its cash, and if applicable, line of credit borrowings, to therefore make better decisions.
- Enhance monthly reporting packages. A company’s monthly reporting package can be enhanced to provide more useful information to its users. If not already included, key metrics can be added including liquidity ratios, days outstanding on receivables and payables, EBITDA, gross margins, and leverage ratios. Financial information should include monthly and year to date (YTD) information comparing to the prior year and budgeted amounts. Monthly financial statements can also include notes and commentary from management, which will provide readers with explanations for changes and leave an informative trail that can be referenced in the future.
- Develop a capital expenditure budget. This can sometimes be overlooked, but it is important due to its impact on cash flow or borrowings with the bank. When financial conditions change, management should review its capital expenditure budget and make the appropriate updates. Prioritize the budget into critical items that need to be addressed immediately versus those that could wait until business returns to normal conditions.
- Update forecasts on a regular basis. Taking steps to update forecasts regularly will assist management’s decision-making process throughout the year. Utilizing actual results in conjunction with updated forecasts for the remainder of the year will allow management to better predict its results and institute timely changes, rather than trying to make adjustments later in the year when the damage is already complete.
The pandemic is an unprecedented event for today’s business owners and leaders. It is crucial to have valuable and timely information available to ensure your business is operating effectively and to assist owners and management in making decisions. Reviewing your financial performance information periodically to ensure that it is adding the most value to enhance and improve the decision-making process can be beneficial in the short and long term.
You may also like: