Life in the Wake of COVID-19
Updated: Mar 30, 2021
The world changed dramatically in March 2020. The full effect of COVID-19 was very different from one market to the next. Here in New York, businesses were shut down early and remained shut down for a long period of time. Of course, office systems dealerships were deemed essential and allowed to operate but had to map out a new way of operating. Some dealership owners I’ve talked to in other markets were impacted only slightly. The impact seems to run the gamut. However, everyone has felt and will feel the impact for months to come.
As you move into the next phase of the “new normal” - a phrase I hate but have learned to live with - there will be some important areas to consider to ensure the long-term success of your company.
Paying very close attention to your financials will be more important than ever. Most dealerships are billing their service agreement clicks and/or overages in arrears. Because of this we will not see the full impact of a slow down in business right away. If you bill clicks yourself, you may not see the full impact for anywhere from 30 to 90 days from the time volumes dropped off. If a leasing company bills the clicks on your behalf, you likely won’t see the full financial impact for 60 to 120 days. The first thing to monitor more closely is the overall service revenue. It will be important to see trends early. This will allow you time to react. If revenues are down you will need to adjust your expenses accordingly to maintain a profitable business.
Next, I would monitor supplies costs of goods very closely. One way to partially offset a drop in service revenue is make sure you have a corresponding drop in toner and other supply costs. If you don’t have a strong program for verifying usage before sending out requested toners, now is the time get one on in place. You can raise profit margins and help cash flow by reducing the amount of $0 invoice supplies you send out.
The next area that will be important to monitor is payroll. I would keep a close eye on payroll by department as compared to revenue and compare this to last year. If there is a drop in revenue it may be necessary to adjust payroll to maintain a profitable business model.
Finally, the income statement should be monitored very closely for all expenses. This is not a time to allow expenses to go unchecked. During difficult times you want to economize in areas of the business that do not affect revenue generation. This distinction is an important one. Economize, by definition, means to cut out waste. I suggest being careful to not cut marketing, sales, etc. in a way that would damage the business in the long run. However, expenses like entertainment, travel, facility leases, phones, etc. could be reviewed and reduced without a negative impact on revenue.
It will also be important to closely monitor the balance sheet in the coming months. You will want to watch trends for cash, A/R and inventory on the asset side. If cash is dropping, you need to know it and react accordingly. I have seen an increase in the A/R aging for many of our clients in the wake of COVID-19. It isn’t surprising, as companies are holding on to cash and some are slow to pay since they are short-staffed and can’t process payments as quickly. I suggest staying on top of the A/R and doubling down on your collection efforts. Remember, the squeaky wheel gets the grease. Be the polite squeaky wheel with your customers in collection efforts.
Paying closer attention to inventory can also pay dividends in tough times. Almost every dealership I’ve worked with could benefit from closer management of the inventory. When business and cash flow are good, you can afford to carry more inventory than what is necessary. When times are tougher converting some of that inventory into cash will be a huge help.
As mentioned in the revenue section earlier, monitoring service agreement volumes is important at this time. Service revenue and service profit drive much of the overall business. I suggest looking at revenues on a monthly basis from 2019 and using this data to forecast the rest of 2020. By doing a contract-by-contract review you will likely get a much better handle on what the future will hold. Being able to predict the service revenues for the coming months will help with planning the expenses above and will show you where you need to concentrate your efforts.
The next area I would pay very close attention to is overall workload. In particular, I would be looking at service call volume on a weekly basis. Technician time is like a basement in your house. If there is space it will get filled. Technicians will have a full day of “work” every day. However, you need to know if the techs are doing three calls a day or five calls a day. This can be compared to last year to see what the targets should be. You can also monitor the customer and travel time of each tech. When workloads drop the amount of accountable time drops as well. This may indicate a need to adjust headcount.
Sales activity should also be on your radar now more than ever. Theoretically, there should be some pent-up demand. There are likely customers and prospects whose leases expired during the COVID-19 shutdowns. You want to be sure that all customers and prospects with leases that have expired or will expire are getting the attention required to complete the renewal process. Furthermore, much of your competition may not have kept up with their customers during the shutdowns. The sales reps who work the hardest and smartest during this time will reap the rewards. Spending some extra time reviewing the sales team’s activity level and making sure they are productive will pay big dividends.
The last area I want to touch on is tax planning. Most of the folks I have spoken with applied for and received a Paycheck Protection Program (PPP) loan. At the time of this writing, the guidance provided by the IRS is that, though the forgiven amount of the PPP loan is tax-free, the expenses that were paid with loan proceeds cannot be deducted from gross income. The net effect is that you or your business will be taxed on the forgiven amount. If your business is an S-Corp or similar pass-through company, this will lead to a tax burden of anywhere from 30% to 40% for most. Be sure you have calculated this into your tax plans. My advice is to be sure you have enough money set aside to cover the tax bill. No one wants to be hit with an unexpected cash demand come tax time.
These are trying times. The have and will continue to test every business owner. Those who invest the effort to properly monitor and manage their business will have the best chances of coming out the other end in good shape. Those that don’t will suffer further and may not make it through. If I can help you in any way, don’t hesitate to reach out. My wish for each of you is to flourish and prosper through this tough time. Be safe and stay well.
Jim Kahrs is the founder and president of Prosperity Plus Management Consulting, Inc. Prosperity Plus works with companies in the office systems industry building revenue and profitability and helping dealership owners achieve their personal and professional goals. Jim can be reached at 631-382-7762 or firstname.lastname@example.org.
Image by Tim Votapka