The world changed dramatically in March 2020. As the full effect of COVID-19 became more clear worldwide, its impact was very different from one market to the next. Here in New York, businesses were shut down early and remained that way for a long period of time.
Of course, office systems dealerships were deemed essential and allowed to operate, but had to map out a new way of operating. But some dealers in other markets were impacted only slightly. The impact seems to run the gamut, but everyone has felt—and will feel—the impact for months to come.
As you move into the next phase of the “new normal”—a phrase I hate but have learned to live with—there will be important areas to consider for ensuring the long-term success of your company.
Paying very close attention to your financials will be more important than ever. Most dealerships are billing their service agreement clicks and/or overages in arrears. Because of this, we will not see the full impact of a slowdown in business right away. If you bill clicks yourself, you may not see the full impact for 30 to 90 days from the time volumes dropped off. If a leasing company bills the clicks on your behalf, you likely won’t see the full financial impact for 60 to 120 days.
The first thing to monitor more closely is the overall service revenue. It will be important to see trends early—this will allow you time to react. If revenues are down, you’ll need to adjust your expenses accordingly to maintain a profitable business.
Next, monitor costs for supplies very closely. One way to partially offset a drop in service revenue is make sure you have a corresponding drop in toner and other supply costs. If you don’t have a strong program for verifying usage before sending out requested toners, now is the time get one in place. You can raise profit margins and help cash flow by reducing the amount of $0-invoice supplies you send out.
The next important area is payroll. Keep a close eye on this by department as compared to revenue, and then compare it to last year. If there is a drop in revenue, it may be necessary to adjust payroll to maintain a profitable business model.
Minding Expenses
Finally, the income statement should be monitored very closely—this is not a time to allow expenses to go unchecked. During difficult times, you want to economize in areas that do not affect revenue generation. This distinction is an important one. Economize, by definition, means to cut out waste. I suggest being careful to not cut marketing, sales, etc. in a way that would damage the business in the long run. However, entertainment, travel, facility leases, phones, etc. could be reviewed and reduced without a negative impact on revenue.
It will also be important to closely monitor the balance sheet in the coming months. You want to watch trends for cash, A/R and inventory on the asset side. If cash is dropping, you need to react accordingly. I have seen an increase in the A/R aging for many of our clients in the wake of COVID-19. It isn’t surprising, as companies are holding on to cash, and some are slow to pay since they are short-staffed and can’t process payments as quickly. So be sure to stay on top of the A/R and double down on your collection efforts. Remember, the squeaky wheel gets the grease. Be the polite squeaky wheel with your customers in collection efforts.
Paying closer attention to inventory can also reap dividends in tough times. Almost every dealership I’ve worked with could benefit from closer management of the inventory. When business and cash flow are good, you can afford to carry more inventory than what’s necessary. When times are tougher, converting some of that inventory into cash will be a huge help.
As mentioned earlier, monitoring service agreement volumes is important at this time. Service revenue and service profit drive much of the overall business. Look at revenues on a monthly basis from 2019 and use this data to forecast the rest of 2020. By doing a contract-by-contract review, you will likely get a better handle on what the future holds. Being able to predict the service revenues for the coming months will help with planning the expenses above, and will show you where you need to concentrate your efforts.
The sales reps who work the hardest and smartest during this time will reap the rewards. Spending extra time reviewing the sales team’s activity level and making sure they are productive will pay big dividends.
The next area of focus is overall workload. In particular, look at service call volume on a weekly basis. Technician time is like a basement in your house—if there is space, it will get filled. Technicians will have a full day of work every day. However, you need to know if the techs are doing three calls a day or five. Compare this to last year to see what the targets should be. You can also monitor the customer and travel time of each tech. When workloads drop, the amount of accountable time drops as well. This may indicate a need to adjust headcount.
Contract Renewals
Sales activity should also be on your radar now more than ever. Theoretically, there will be some pent-up demand. It’s likely there are customers and prospects whose leases expired during the COVID-19 shutdowns. You want to be sure that all customers and prospects with leases that have expired (or will expire) are getting the attention required to complete the renewal process. Furthermore, much of your competition may not have kept up with their customers during the shutdowns. The sales reps who work the hardest and smartest during this time will reap the rewards. Spending extra time reviewing the sales team’s activity level and making sure they are productive will pay big dividends.
The last area is tax planning. Most of the folks I have spoken with applied for and received a Paycheck Protection Program (PPP) loan. At the time of this writing, the guidance provided by the IRS is that, though the forgiven amount of the PPP loan is tax-free, the expenses that were paid with loan proceeds cannot be deducted from gross income. The net effect is that you or your business will be taxed on the forgiven amount. If your business is an S-Corp or similar pass-through company, this will lead to a tax burden of anywhere from 30% to 40% for most. Be sure you have calculated this into your tax plans, and that you have enough money set aside to cover the tax bill. No one wants to be hit with an unexpected cash demand come tax time.
These are trying times. They’ve tested, and will continue to test, every business owner. Those who invest the effort to properly monitor and manage their business will have the best chances of coming out the other end in good shape. Those who don’t will suffer further and may not make it through. If I can help you in any way, don’t hesitate to reach out. My wish for each of you is to flourish and prosper through this tough time. Be safe, and stay well.
