As COVID-19 continues to cause significant disruptions both economically and socially, many businesses are facing the tough decision—or are being mandated—to temporarily close their doors. While the current situation can seem overwhelming, there are steps you can take to manage the short-term negative impacts to both your business and employees.
Practical measures you can take today
Whether on their own initiative or as part of government mandates, some Canadian businesses are temporarily suspending their operations in response to the COVID-19 pandemic. Concerns about the long-term implications of these closures are understandably making business owners uneasy. However, it’s no time to panic. There are several practical steps businesses can take to help navigate the current turbulence—starting with closely examining cash flow and identifying critical areas where costs can be reduced in the short term.
Let’s put these into context and look at a real-world example. When a restaurant was mandated to close for two weeks, the business owner took these steps to protect his business:
- Employment and labour: To address an immediate variable cost, the restaurant owner quickly obtained advice from a lawyer about temporarily laying off his employees so they could receive employment insurance benefits and the business could reduce its expenditures in the absence of revenue. Although there are some costs associated with laying off workers and enabling employees to claim employment insurance, this move gave employees the ability to continue earning some income, while allowing the business owner to manage his cash. While the ability to legally and practically lay off employees will vary from business to business, in this case, it was considered necessary.
- Bank and finance: The restaurant owner reached out to his bank about his situation and secured a commitment to temporarily increase his operating line and gain some flexibility on his payments to minimize his cash outflow. To do this, the business owner prepared a cash flow statement to demonstrate his cash requirements over a six-week period, with sensitivity analysis to show the impact of a closure over a period of two to six weeks. Engaging financial stakeholders early is important as business owners may be able to secure necessary concessions, gain access to needed capital and reduce expenses in the short term.
- Real estate and leasing: The restaurant owner reached out to his landlord for short-term rent reconsiderations. In the current climate of uncertainty and unease, landlords and lessors may be able to provide businesses with some needed breathing room, even if it’s only a deferral of rent obligations for a few weeks.
- Supply and inventory: As the business was not operating in the short term, the owner quickly suspended the ordering of all supplies and inventory. Most surplus inventory was used in the days leading up to the temporary closure.
- Critical service providers: The restaurant owner identified suppliers and service providers critical to helping him navigate the current reality, such as his primary food supplier, lawyer and advisors.
By taking these steps, the restaurant owner realized that nearly 70 percent of his business costs were variable, and he was able to greatly reduce the business’s short-term cash burn. With temporary concessions from his bank and landlords, along with some additional government supports, the cash burn may be further reduced to help the business endure the temporary closure.
Although these are uncertain times and business owners are rightfully uneasy, looking at a temporary closure rationally can alleviate feelings of helplessness that many are experiencing. While every business situation is unique and requires its own analysis, hopefully the above example provides some insight to those who may be in similar circumstances. While these issues may seem overwhelming, Grant Thornton helps businesses navigate serious financial challenges every day.
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