The COVID-19 pandemic left shockwaves in its wake as countries across the world experienced a serious health threat to workforces, sudden drops in demand as whole populations were asked to stay home, and supply chain disruptions with no clear end date in sight.
It is nearly impossible for an organization to prepare for an event of that magnitude, which forced many operational strategies into more of a “reaction” mode than a position defined by strategic planning. Coming out of the pandemic, it will be critical that organizations go back to the basics and create a project plan that focuses on the factors that fall under the organization’s domain. Chief among them will be a game plan for managing both capital and operating expenditures. Starting to put a plan in place now will help your organization brace for the COVID-19 shockwaves and potential long-term economic consequences from the coronavirus pandemic.
Did your organization put a financial playbook together after the 2008 financial crisis? If it did, now is the time to dust it off. A project plan for managing your capital and operating expenditures in a post-COVID-19 world will be a significant undertaking because there was such a wide-scale impact. Depending on the sector in which you operate, you may already be feeling an immediate financial impact from COVID-19.
Your COVID-19 capital and operating expenditure plan will most likely be part of a broader liquidity plan. (For more on liquidity planning, see our earlier articles, The 13-Week Cash-Flow: An Important COVID-19 Survival Tool for Your Business and Your Guide to Crisis Management and Liquidity). While similar to your annual business plan or budget season process, managing expenditures during the pandemic is likely to be more intense. Your organization’s well-being may depend on the level of liquidity you can conserve in the short-term without damaging the strategy you had set in place for your organization before the pandemic.
Capital and operating expenditures encompass a wide swath of activities, so it is important to have the right voices and decision-makers at the table. One of the first steps your organization will want to undertake would be to designate an executive committee, consisting of members of senior management, to provide direction and approve final decisions. Additionally, a project team that reports to the executive committee is needed with representatives from across the organization. Representatives from your planning group, as well as department or functional area project managers will be the most appropriate candidates for the COVID-19 capital and operating expenditure project team.
Divide and Conquer
As your senior leadership provides an overall strategy for reducing capital and operating spend, it is important to remember that different operational areas will have unique needs and priorities. While a flat percentage reduction across all departments may achieve the level of expenditure reduction believed to be needed, it may result in greater risk to the overall company. Care should be taken to ensure that no critical systems or processes are broken as a result of cost reduction activities.
Expenditures may be scrutinized by both functional business units as well as P&L line items. For reporting to the executive committee, potential reductions to both capital and operating expenditures should be segmented by those that are near certain of being achieved, those that are likely, and those that require additional investment and/or process change to achieve the potential reduction. The project team should leverage existing technology to collect suggestions for cost savings and compile information into dashboards that can track key metrics and display results.
In order to communicate priorities and identify potential expenditure reductions, the project team will need frequent communication with all departments. Focus not only on the areas where spending is discretionary or redundant but also on areas that are deemed essential and core to operations, such as customer-facing business lines. This exercise will help determine what aspects of your operations should not be modified and more importantly, what areas may be easily adapted due to duplicated activities.
It is important to be flexible, but also realistic in terms of the “drive the engine and keep the lights on” functions. Scrutinize assumptions and challenge department leaders’ inclination that there is no room for expenditure reduction. Are there expenditure line items that may be reduced completely with no negative outcomes? Do alternative options or vendors exist? Consider if there are long-term contracts that may be renegotiated. No idea should be off the table. The project team many need to redefine what is essential under these new circumstances; new projects, while necessary, may need to be postponed.
Other Management Strategies
In addition to employing your liquidity plan and the capital and operating expenditure plan discussed within this article, management should utilize this time to implement other best practices that result in a more efficient organization. Identify departments or functions that are overdue for a process review. Improving processes often results in efficiency gains and long-term costs saves as well, but always keep your internal control environment in mind when making these changes.
Implementing a cost-benefit analysis and formal approval process for all capital expenditures over a certain amount is a natural outcome of the capital expenditures project plan. Examine your client or customer base and evaluate whether your organization has any marginally profitable customers that no longer fit your strategic plan. Now may be the time to retire these contracts if they are not serving your bottom line. Similarly, if you have questioned whether to continue or exit certain business lines, now is the time to act.
You may also want to consider centralized vendor management or procurement if you have not already. Make strategic adjustments to your supply chain to lower your administrative burden as well as lower margins of error with respect to delivery.
After your team has developed a capital and operating expenditure plan to navigate the rest of the year, schedule an executive meeting to break down lessons learned and document the strategies implemented by functional business unit. It will be important to monitor adaptations and adjust aspects of your business when economic situations begin to normalize. Strategic documentation will also assure that you have a model in place to deal with unexpected situations that will present drastic financial impacts to your operations as they arise in the future. Keep in mind, some of the suggested changes may result in your company emerging from this pandemic with improved and more efficient processes for the future.
The COVID-19 pandemic is continually evolving. Assessing impacts to capital and operational spending will be vital for your organization to adapt to the dramatic changes. Visit our resource center for up-to-date information on how the pandemic may affect your organization or you can contact us for more information.
Published on May 05, 2020