Should sales or revenue significantly drop as a result of a crisis, then cashflow will become a critical component of a business’ ability to survive.
A number of our clients have already commenced discussions with their bank around multiple scenarios of revenue reduction and what they might then need to financially bridge the business, allowing them to continue paying suppliers or workers.
Under some of these scenarios - those at the more extreme end – the business also needs plans in place for significant cost reduction. This means business are wise to assess where their fixed and variable costs are, and therefore where there is flexibility for change.
Examples of fixed costs are rent or leases for buildings, office or retail space, and insurances. A variable cost is an expense that changes in proportion with production output.
Examples of variable costs could be employee remuneration and office supplies that change based on the amount of work performed.
A business may still need to pay its rent for the space it occupies to run its business irrespective of the volume of work or number of sales that occur.
Taking employee remuneration as an example, temp, contract or casual workforce costs are easy for a business to vary based on demand. Likewise, the amount payable in commission for permanent employees, could reduce in proportion to the number of sales made.
On the other hand, salaries for permanent employees are an ongoing obligation. If businesses are considering reducing the number of workers they employ, either on a temporary or permanent basis, significant consultation processes are required to ensure compliance with New Zealand legislation, and to prevent any future costs associated with Personal Grievances.
So what should a business be considering now:
Contractual terms for fixed costs, especially termination clauses, and alternative lower cost opportunities
The proportion of variable costs, and what processes might be involved in reducing these
Where costs can be reduced in the short-term, now, to allow for greater cash-flow if future restrictions apply
It is important that as much of this planning should be done now while you have the resources to hand. Remember that some of your providers – like your bank, accountant, payroll company, insurance provider – will be under increased pressure from their customers during a crisis and will be grappling with their own internal business pressures. Identify who you need to speak with and in which priority.
In addition, the IRD and ACC have initiatives in place for businesses that have been directly impacted by Coronavirus which, for some of our clients, is already proving very useful. These include the delay of payments, or the wavering of penalties.
If you need help to assess your Fixed versus Variable costs, review contractual terms, or manage workforce considerations, the team at K3 are able to provide advice and recommendations.