Managing the Coronavirus crisis: “Conserve Cash”

What small & mid-sized ‘white-collar businesses’ could do to ensure business continuity. And why they must do it.

In moments of economic crisis such as the current COVID (or China Virus) one, small family-run businesses or inexperienced business leaders (even in mid-sized companies) can tend to consume accumulated business profits to fund ‘Operational Expenses’.

This, in my opinion is a disastrous way of running a business.

The one time i took a loan to run operations

I have now seen multiple economic downturns and a general couple of bad business years in running Srijan since the year 2000. Barring one year, i have never ever taken a loan to run an operation.

This was in 2010–11. With a new partnership forged with a couple of ambitious business leaders, we spread our expenses way beyond our financial reach in anticipation of business that we would close driven by the new partnership. Inspite of my huge instinctive reservations, i failed to stand by my principles of financial conservatism & prudence, and for instance, agreed to signing up for a swanky office in an expensive Gurgaon building.

10 months later…

1. i was sitting at the feet of the property owner pleading him to return ‘my’ (Srijan’s actually) hard earned money — the money was not due to us per the “lock-in period of 18 months” and he was legally allowed to keep a large chunk of the advance cash we paid. However, i was desperate. (The ‘sitting at the feet, pleading’ point is not too much of an exaggeration!).
2. i had to take a business loan from a bank to pay off salaries

Do NOT use cash reserves to run operations

If you were to take one advise as an entrepreneur with the experience of having built a fairly successful mid-sized business (after a long-long struggle for majority the 20+ years), it would be to have this metric for measuring the financial health of your business:

“For how many months ahead are you in profitability month-on-month?”

This means that if you are starting a new financial year on 01 April, then for how many months aheads do your books show that you are profitable month on month — is it 3 months or 6 months or the whole year?

To date in Srijan, i have never seen a month-on-month profitability for 12 months ahead. But that is a business goal i personally pursue. What does this do to the business — let’s examine this:

1. It constantly pushes the business (and the sales team) to find long-term predictable business or long-term contracts
2. It gives you an indication of how much risk can you take in expensive investments — such as hiring expensive business leaders
3. It tells you what costs can you cut to ensure that you are not in the RED in any month OR if you are that it is only ‘predictably temporary’
4. It allows you to do worst case planning way ahead of time

When Srijan was a really tiny company of under 30–40 people, i used to include past reserves into such business planning —this i call Cash Flow planning. As we started growing, while i kept that index of ensuring Cash Flows, my measure was always about month-on-month profitability for that year. You start with measuring ‘cash flows for the year’ and graduate the business goals to ‘profitability planning for the year’.

Why is conserving accumulated profits so important?

The simple answer is that accumulated cash tends to ‘vanish’ very quickly if costs are not fed from the earnings.

All the years of hard-work of the primary entrepreneur can come to a naught within just a few months. It can come down to “hand-to-mouth” again. I say ‘again’ because all startups start with a hand-to-mouth situation and retain that many many years.

And in such cases, all the employees of the company, to sustain whom such a business decision (of funding OpEx from accumulated profits) is made, will anyway be threatened. Nothing meaningful is achieved in this process.

The threat of financial imprudence to the business

It has to be clearly understood that the survival of the business is primary. Businesses are engines of jobs and economies.

Just as entrepreneurs delay gratification for themselves by usually taking low salaries and pumping their part of their profits back into the business, the business must think like that as well.

So if short term decisions, of letting employees go or that of doing massive austerity measures are needed, they must be done…for the sake of the business. For surely, once the business is out of the economic mess, it will grow and employ many people once again.

Responsibility of the entrepreneur towards oneself

Practically speaking, once any business is troubled times for sustained long periods of time, most employees will leave to pursue their careers elsewhere, while leaving the business and entrepreneur handicapped with no cash.

The entrepreneur will be left to wade through the hand-to-mouth situation to rebuild the business. [Caveat : In no way, am i virtue-signalling to employees for leaving in pursuit of their careers. I am simply stating the obvious — most employees do not sign up for struggling along with bare necessities for years alongwith the primary entrepreneur(s)].

This restarting of digging the well all over again, having burnt all the cash reserves, should be an unacceptable situation for any entrepreneur.

Entrepreneurs with a sense of purpose/mission owe it to society

There are four pursuits (Four ‘Purusharthas’ to be accurate) in Hinduism — Dharma, Artha, Kama, Moksha — that any individual must pursue. And in pursuit of these purusharthas i remember reading this somewhere:

Artha and Kama must be pursued on the side of Dharma

Dharma cannot be pursued without Artha

In other words:

— wealth and desires (sexual, material/pleasurable) must be pursued on the side of righteousness

— without wealth there can be no pursuit of righteousness or lofty objectives/missions (for a human being, society or a nation).

Responsibility of the business towards ‘participating’ shareholders

How i ran the business in my role as a CEO (or COO) — as a manager of a business — back then had a consequence for the shareholders. How i am as an individual (my value and beliefs) must and will influence the business surely, but the needs of the business cannot be clouded by my emotions and values only.

Further, my CEO/CXO role cannot be smudged with my role as a participating shareholder. In other words, as a business manager i had a responsibility towards participating shareholders to ensure that the company they work in and have shareholding in, is given value.

I learnt the lesson of separating my role as a business manager, myself (my values, my ideals) and my role as a participating shareholder of the business, unfortunately nearly 15 years after starting Srijan. My business coach from back then, Darshant Bhat, gets all the credit for waking me up to this distinction.

Business leaders co-running the business, the primary entrepreneurs and the participating shareholders must take these tough calls. Business leaders owe it to the entrepreneurs and the delayed good the business brings via job creation and movement of economic wheels. And entrepreneurs owe this to themselves as well as to the society and nation they operate in.

Am i justifying large-scale layoffs?

No. As business leaders, as entrepreneurs and simply as a responsible leaders of society, one cannot make reckless decisions. It is entire families which are at stake.

What is a better model?

Entrepreneur-led companies or family-led companies are a good example. Most likely they would end up taking massive pay-cuts for themselves.

Extending these pay-cuts to the entire organisation is a good way for all the people to participate in a downturn…and show camaraderie with their promoters, their business leaders, their colleagues and with the business itself. In my worldview, even if the company can afford it, it is a good idea for all levels barring perhaps the absolute bottom-of-the-pyramid (office boys, janitors, others) to take such cuts.

Again…in my worldview all white-collar job workers including the participating promoters and business leaders taking pay cuts is a good first way to venture upon cost-cutting measures as opposed to lay-offs.

Please understand that on an average 70% of all expenses in white-collar industries falls under the payroll head. Savings there help any business in a very big way.

What have we done at Srijan

We at Srijan have taken strong austerity measures. We have taken graded pay cuts (among other things such as letting go off our offices) to ensure we’re meeting the month-on-month break-even situation.

Our business leaders at Srijan proposed heavy pay-cuts and reducing-graded pay cust. We did not go to pay-cuts below a specific annual compensation level.

Every appraisal process, we have to unfortunately, let-go a few people on performance grounds. Our senior leadership was very uncomfortable doing that in these difficult times. Hence, we did not go that route this time on human grounds.

We will continue to review this situation and do what is necessary, on a month-on-month basis…and do whatever more is necessitated for the survival of the business and for conserving cash.

In Conclusion

1. As an entrepreneur it is incumbent upon you to take highest cuts be part of the top-grade of the pay-cut. Yes, i know it may feel like back-to-grind again…but that’s the path of endlessly delaying gratification that you as an entrepreneur have chosen.
2. Ensure pay-cuts at all levels (as much as possible) of your white-collar organisation. Talk to your employees transparently. They will understand. If this means letting go off some people do that…but you might want to do this basis their social/family conditions…employees from well-off families will understand this, infact they will appreciate it.
3. Focus on simply breaking even. In this type of unprecedented economic situation, look for breaking even…you can look for profits and growth later.
4. Please, please, please conserve your cash.