Managing costs in a global scenario of shrinking revenue
The amount of cash that a company bleeds in the context of its current and future revenue may be the only gauge of its survival quotient. Taking an axe to costs may be the most effective step a company can take in the current uncertainty created by the coronavirus pandemic.
Revenue forecasting, essential for a company’s development, relies on predictable market conditions. Uncertainty over the duration of the ongoing ‘lockdown’ imposed by most countries has raised the specter of a drastic reduction in revenues for most businesses. Particularly affected are businesses deemed ‘non-essential’ by local and federal governments and forced to go into lockdown.
“We have a situation today that no business school has ever taught. In fact, the way governments and businesses respond to the economic threat is likely to become a future course in B-schools,” said Bahjat Radaideh, a business consultant.
Stock markets around the world have witnessed massive drops in share values from the start of 2020. The Dow Jones index has lost more than 24% of its value, the FTSE more than 28% and the Nikkei more than 22%. If a stock market is an indicator of the health of an economy, the prognosis is extremely challenging.
As the economic toll tied to the coronavirus intensifies, the number of Americans seeking unemployment benefits hit a record high for the second week in a row with more than 6.6 million people filing jobless claims in the week ended 28 March 2020. That was nearly double the week earlier, which was also a new record.
China, which accounts for one third of manufacturing globally, and is the world’s largest exporter of goods, saw industrial production fall by 13.5% in the first two months of 2020.
The Organization for Economic Cooperation and Development (OECD) has warned that the global economy could grow at its slowest rate since 2009 this year due to the coronavirus outbreak. OECD has forecast growth of just 2.4% in 2020, down from 2.9% in November. But it said a longer, more intensive outbreak could halve growth to 1.5%.
By that yardstick, Jordan’s GDP growth will witness a similar contraction this year from the 2.2% predicted by the International Monetary Fund at the start of 2020.
According to Osama Al Sharif, a journalist and political commentator writing in Al-Monitor, Jordan’s tourism sector, which contributes about 19% of GDP, is feeling the immediate effects of the lockdown. Business analyst Jawad Abbasi told Al-Monitor that tourism expenditures rose by 10% in 2019 to reach 4 billion JOD($5.6 billion), mostly in foreign currency.
“With the coronavirus outbreak,” he said, “it is certain now that the tourism sector has lost the spring and most of the summer seasons, if not the rest of the year.” He added that this means the loss of over $3 billion in foreign currency, but even worse is the fate of over 54,000 people working in the tourism sector.
Economic analyst and columnist Salameh al-Darawi told Al-Monitor that the repercussions of the coronavirus outbreak are “the most serious threat to Jordan’s economy since the establishment of the kingdom”.
Former Minister of Economic Affairs Yusuf Mansour believes those most affected by a prolonged coronavirus lockdown will be workers and service providers in the informal economy, such as farmers, barbers, fast food workers and taxi drivers, who make up between 30% and 40% of the workforce.
In such a dire economic situation, companies are more than likely to see a significant contraction in revenues. The most immediate and effective response to the looming threat to business continuity, according to Radaideh, is to “take an axe to costs”.
“The primary focus for now has to be on aligning costs with the lower level of revenues, or the survival of the company itself comes under doubt,” he said.
Financing
The first stop for the owner or chief financial officer of a company has to be the bank, especially if the firm has loans it needs to service. Most banks, shored up by the liquidity released by various government measures, are open to offering ‘repayment holidays’ to corporate borrowers.
“Cutting the cost of loan servicing could be one of the most significant measures a company can take in these troubled times,” Radaideh said. “Just ensure that the repayment holiday does not come with fees or strings attached, which could negate its financial benefits some months down the line.”
However, he recommends that, instead of rushing to ask for a repayment holiday, companies should do an honest assessment of whether they actually need it. “Those with firm government contracts, for instance, in the essential services sectors, may be able to service their loans without problems.” This, he adds, would free the banks to focus their liquidity on companies with good track records but in more dire straits today.
Rent
With 80% of the workforce in Jordan working from home, most companies would have no need for large or multiple premises. “This is a good time to assess the size of offices required in the short to medium term,” Radaideh said. “Give up the most expensive square footage for now. You can always rent it back when staff returns to work.”
He also recommends that, like the bank, request the owner of your office space for a ‘rent holiday’. “The optimal solution is to offer the landlord a reduced rent for short but renewable periods, with the agreement that you will partially make it up when business gets better.”
Social Security
As part of the crisis alleviation measures, Jordan’s Social Security Corporation has reduced the social security subscription ratio for companies and employees from 21.75% to 5.25%. The move aims to alleviate the financial burden on both employer and employees.
“A company can redeploy the money saved toward staff safety and re-training, paying subsistence salaries to staff that are deemed redundant for now but will be needed when business gets better, or in diversifying and strengthening revenue sources,” said Radaideh.
Go ultra-digital and automate
This may be a good time to ramp up digital strategies. Cut spending on real-world operations and redeploy the cash to develop self-service channels for customers, for instance. At the same time, switch customer engagement and marketing efforts as well to digital channels.
“At the end of the day, there is no ready reckoner or playbook that companies can turn to for help in surviving the COVID-19 crisis,” said Radaideh. “Owners and managers just need to be constantly aware that every dinar they save today will increase the continuity or lifespan of their company by a commensurate period. Ultimately, that may be the only way to survive the crisis.”
Payroll
Being one of the largest cost centers on a company’s P&L sheet, payroll cannot be ignored. “But tread gently,” said Radaideh. “You don’t want to create a situation where you put the livelihoods of so many people at risk in an uncertain period. Besides, the way you deal with your staff today will have a lasting impact on your business when the situation eases and you’re ready to hit the market all guns blazing, so to speak.”
The HR team of a company could start by creating a layered list of workforce members graded by how essential they are to operations in the current period. Based on the grading, the company could offer some staff full pay but reduced benefits, some of them reduced pay and benefits, others a token salary while they remain benched but available, and yet others a severance package.
“The success of a business depends on its people. Keep that in mind when switching your axe to the payroll,” Radaideh said.
