The coronavirus pandemic essentially served as a real-world stress test for organizations, and it remains an unpredictable force in our society. Leaders and executives are making significant decisions without reliable information amidst a constantly shifting economic and regulatory landscape. Whether your company adjusted to a painful new reality, pivoted to new products and services or experienced a surge in demand, all organizations should evaluate their ongoing response and pinpoint what worked, what didn’t and what could be improved. Below, we discuss the need to reevaluate the cost structure of your business.
Pre-COVID-19 Business Operations
Prior to the global pandemic, your business model included decisions on which products and services to offer, the activities needed to successfully generate revenue streams and how to handle key activities. Hopefully, the pricing of your products and services were sufficient to cover the overall costs incurred and generate a sufficient profit. Even without the COVID disruption, the cost structure of a business will change over time based on the addition or subtraction of revenue streams, changes in revenue volume, new innovations and technologies, competitive pressures and evolving regulations.
Forced Changes to Your Business Operations
The disruption to your business is playing out in several phases. The initial phase, beginning in March 2020, likely resulted in immediate and significant changes to your normal business activities and revenue streams. For many industries, it resulted in complete closure, while in others it meant a transition to a remote work environment.
The second phase started when health care professionals gained a better understanding of virus transmission, social distancing and other tactics were implemented and business activities resumed (to the extent possible). Business owners and operators have had to revamp their operations with the health and well-being of their employees and customers as priority number one.
The third phase will begin when a reliable vaccination is widely available. Many businesses may revert back to pre-COVID-19 ways of doing business; however, the forced changes and workarounds implemented during the disruption (working remotely, greater use of technology, innovations) may outlive the virus.
What are the Key Cost Components of Your Business?
The industry in which your business operates will help dictate its cost structure. Some industries are more labor intensive than others and some require more investment in facilities, equipment and other fixed assets. The delivery system used to reach customers is another factor. Service providers, manufacturers, wholesalers, retailers and rental activities will have vastly different cost components. Understanding and tracking the primary cost elements of your business and comparing to industry financial benchmarking data can help evaluate the operating efficiency of your cost structure, as compared to your peer group.
Impact to Your Business Cost Structure
Important questions that impact your current cost of doing business include:
- With our modified operations and the anticipated ongoing demand for our products and services, how many employees do we need to operate efficiently but safely?
- What is the expected impact on our critical supply chains and the availability and cost of materials?
- Based on how we expect to conduct business activities for the foreseeable future, can we mitigate our occupancy costs (office space, store fronts, plants and warehouses)?
- Based on our current workplace environment, is our equipment underutilized and what impact does that have on our average unit cost?
- What are our revenue projections for the next 18 months? Revenue volume impacts the utilization of your fixed costs and determines the level of variable costs needed.
Remember, your business is not alone in grappling with COVID-19’s impact – so are your competitors, which levels the playing field somewhat. Business decisions are best made when they are based on good data, but the current reality may change your historical financial trends and performance metrics (gross margin, operating margin, average cost of units sold). A realistic reassessment of your business cost structure during these unprecedented times will provide a competitive advantage and allow for informed decision-making.
RKL’s team of business advisors and analysts help businesses assess cost structure and make the necessary modifications. Contact your RKL professional or reach out using the form below. Stay tuned to our blog for upcoming installments of our Response and Recovery in Focus series and visit our Business Recovery Resource Center for more insights and guidance.