Every commercial entity has a core business model that they follow. Their models include a number of variables that are closely watched and measured. They will have a revenue goal based on traffic or production units. A variable set target for gross profit margin. A standard for efficiency and productivity is also calculated into any business model. When all the variables are combined, the outcome will determine the level of employees the firm will require along with setting the expected net income and breakeven point that the firm should achieve. Under the impact of the Covid 19 virus, businesses will have to re-configure their prior business model to address the new reality of social distancing to determine if the firm is even viable under the new rules.
Every industry, every company, has to re-assess their viability based on the societal changes we are now facing. We are already seeing the impact in the retail outlets that are open. Social distancing that restricts the number of customers in a store at one time will limit the level of revenue. Concerns over personal contact at the checkout extends the time it takes to move a customer through the payment process. A new transaction cannot begin until the prior customer has fully exited the area. The customers waiting in line are able to proceed only at the pace of the slowest customer ahead of them. Providing the best client experience may require the business to hire and open more checkout lanes increasing labor costs with no corresponding rise in revenue.
The food service industry will likely incur the largest impact. If the dining rooms are to reopen, spacing of tables may drop the acceptable capacity of the room by 50% to 75%. While the firm may not be able to cut labor in the kitchen, they may decrease the server level to offset a portion of the cut in sales. Can your client survive with a revenue cut of this magnitude with a very limited drop in expenses?
Manufacturing firms will also be impacted. Does the current process of production allow for workers to be six or more feet apart at every phase? How much will it cost the firm to relocate existing machines to allow for social distancing? If the firm is already in tight quarters, how many machines will have to be removed and what would the corresponding drop in capacity mean?
Beyond the revenue and labor cost issues, consider the productivity decline we will be seeing. Workers will be required to maintain clean work centers. This means time away from production or helping clients or just slowing down the revenue process to complete new tasks. A slower process in the production to sales cycle that all industries will now face is likely to significantly decrease the efficiency of every company your bank works with. When you match lower levels of revenue to lower efficiency levels, we all have to ask, what will be the impact on profitability and cash flow?
Now is the time to work with your clients to determine the full impact of what the new normal might look like. If we cannot get back to business as usual, based on the new changes, you will need to determine if your clients are now viable to remain in business. In time we may move back to the old business model but there is no guarantee. The new reality is that under the new normal, many companies may not survive.
Is your bank in a position to assist your clients in developing the “new normal” model? For additional information or assistance with this or other banking topics, please contact Brad Stevens at Stevens Risk Management, LLC through SRMALLC.net or email me at Brad.Stevens@SRMALLC.net