As a CEO, one of the hardest decisions you’ll ever make is letting employees go. Unfortunately, many business owners have had to make this heart-wrenching choice in recent months, releasing cherished team members to keep their companies afloat. The question that remains is, “How soon can I hire back the employees I laid off or furloughed?”
Your desire to bring back furloughed or laid off employees is understandable and noble. But you don’t want to put yourself in a position where you will need to lay off or furlough employees a second time in the near future. News broke this week that some companies who received funding under the Paycheck Protection Program are declining the loans for this very reason. They fear that in two months, the date by which the loan money must be spent, their businesses will be too weak to continue paying the rehired employees, forcing a second round of dismissals.
Before you hire anyone back, you need to ensure that your business is generating the revenue you need to pay them. Projecting how much revenue you can generate in the coming months requires having a handle on the market in which you operate, your customer base and their demand for your products and/or services, and cash flow.
If your company supplies essentials services or in-demand products (think personal protective equipment, hand sanitizer, toilet paper and the like), you’re likely doing well. You’ll probably be able to hire back employees the soonest. Who knows, you may even be hiring people now to keep up with increased demand. Likewise, companies that have been able to continuing functioning with remote workers may find that it’s largely “business as usual.”
If you’re manufacturing goods or delivering services that are less “essential,” you may be surviving. But you may not be able to bring back your full workforce as quickly as other companies.
Retail businesses, other than those that have been deemed “essential,” will take longer to bounce back, because they depend on foot traffic. Foot traffic will be determined largely by social distancing restrictions in your state. It also will be influenced by your customers’ comfort with being back out in public.
In addition to the rough timing of your company’s recovery, consider carefully your positioning within the marketplace. How likely are customers to buy from you vs. from a competitor?
Think through the particulars of your operation – how well your value proposition distinguishes you from competitors, what your customer experience is, your reputation, etc. Are you leading the pack, or racing to catch up with others in your space. Be realistic about your chances of winning sales when purse strings are loosened.
A word of warning here: When estimating demand, be conservative. Now is not the time for magical, overly optimistic thinking. The potential consequences are too dire.
With your projected revenue in hand, it’s time to look at cash flow. Knowing whether you have adequate cash flow to meet payroll once you bring back employees involves understanding your operating cycle.
Your operating cycle is the length of time between when you start to spend money to create your products and/or services (e.g., by buying inventory or paying an employee to work on a project) and when you get paid by your client. If this period is 90 days, you need enough working capital to cover expenses (including payroll) the full 90 days.
Remember that as soon as you bring back employees, your expenses will jump. If your projected cash flow doesn’t provide adequate working capital to cover your additional payroll expenses for the entire operating cycle, you are not ready to bring back employees.
Cash Flow Projections Are Your Secret Weapon
The decision to rehire or bring back furloughed employees, as well as other key business decision, should be heavily reliant on cash flow projections. Cash flow projections are your ability to see around the corner.
Ideally, you have plans in place to address a variety of potential scenarios. When circumstances change, execute the plan that best matches your current reality.
Even if you’ve never created strategic plans, now is the time to start. Identify potential scenarios for what you might face in the months ahead, then translate these situations into their impact on cash flow.
Let Your Projections Guide Your Next Steps
Having no revenue at all is a sign to dramatically slow down your spending, and be extremely slow to reactivate your team.
If your revenue is reduced, spend only enough to keep your business on a steady course. Increase expenses – including bringing back employees – only when revenue increases and your projections indicate that you can cover your operating cycle.
A final tip: Just because you have extra cash on hand or access to credit doesn’t mean that you should spend it. Recognize what you are spending the money on. Avoid tapping into cash reserves to cover operating expenses that your business can’t sustain. A better approach would be to invest a portion – not all – of your funds into products or services you could sell.
Someday, we will return to a normal. But we’re unlikely to return to business as it was before the pandemic.
Your ability to move your business forward the right way is dependent on your ability to forecast and your ability to imagine possibilities. Accounting looks at what happened in the past. Forecasting allows you to (no surprise here) look forward.
If you need help with cash flow projections and forecasting, reach out. We’re here to help!