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How accountants can improve a business’s COVID-19 recovery and resilience

Budgeting and forecasting take on more importance

Donny C. Shimamoto, CPA.CITP, CGMA | June/July 2020 Footnote

Editor's note: Updated May 29, 2020

The economic crisis caused by the COVID-19 pandemic turned many accountants into emergency workers. Accountants were called upon to help triage financial hemorrhaging due to lost customers, and to determine whether attempts via Economic Impact Disaster Loans (EIDL) or the Payroll Protection Program (PPP) would sustain or resuscitate impacted businesses.

Strong business recovery requires good scenario planning

As the economy started to reopen, business owners and managers had to make some key decisions. When do we reopen? How much do we reopen? What are the implications of partial reopening to supply chain and personnel costs? What happens if we reopen and infections increase again, and we are forced to close again?

While some of these questions may feel like you need a crystal ball to answer, good scenario planners know that you don’t need to predict the future. Rather, you just need to have good plans ready for major events or changes in assumptions that may shift a business’s direction or decision-making.

Identifying nonfinancial drivers that drive financial results is key

Scenario planning incorporates business drivers and analyzes the impact to sales, operations, personnel, and support activities — all nonfinancial at their root, but decisions in each of those areas have financial implications. Accountants need to collaborate with other business managers to determine which nonfinancial business drivers have material financial impacts and how those drivers behave to changes.

For example, a primarily dine-in restaurant’s revenue is driven by the number of orders they receive, the number of items per order and the cost of those items. The revenue numbers are driven by the cost of the items and the total amount of the order. Simplistically, the expense numbers are driven by the cost of ingredients, wages and tips for servers, and overhead costs of running the restaurant. Consider also the nonfinancial data of the number of orders per day and the number of items per order.

Using the aforementioned data points, we can create a planning model for the restaurant. If I want to increase the profitability of the restaurant, I can do two things: increase revenue or decrease expenses. But how do I predict what people will order? I can’t. But using some of our historical data, I can look at a few key drivers:
  • How many orders does the restaurant fulfill per day?
  • What is the average revenue per order?
  • How many items are on each order?
  • What is the average cost of the items on the order?
  • What is my average personnel cost per order?
Notice that all the above are a combination of financial and a nonfinancial data — with the nonfinancial data driving financial data.

Using business-driver models for scenario planning

Once you understand the relationship between the operational aspects (number of orders, number of items on the order, number of servers working) and financial aspects (revenues and variable expenses), you are ready to use these in scenario planning. Consider these COVID-19 scenarios and the financial implications that need to be thought through.
  1. What happens to our order counts if people are forced to stay home and we can only do takeout orders? Some of the potential driver impacts are:
    1. How many of our customers know that we can do takeout orders? How much will our order counts decrease?
    2. How much of our menu items can effectively be provided via take out? Are there any that can’t be taken out and would need to be removed from the options on the menu? Are those any of our previously biggest selling items?
    3. Can I reduce my daily staffing because of the reduced service levels due to takeout only?
  2. What if we offer food delivery to customers?
    1. Does this change our supply costs? What is the impact to the item cost if I’m now having to use disposable containers to provide the food instead of dishes (i.e., capitalized item)?
    2. Do we do it using our own staff, or should we contract it out (e.g., Uber Eats or similar services)? If we do it in-house, how does that impact my cost per order? Do I need more staff to deliver more orders? Do tips increase or decrease? How much do I need to compensate people for mileage? How does this change our insurance costs? Do we now need additional coverage for business use of personal cars?
  3. As we start to reopen, do we just go back to dine-in primarily? Does it make sense to continue offering takeout or delivery?
    1. How much do we expect customers to want to go back to only doing dine-in? Will there be continued demand for takeout or delivery?
I’m sure as you read through those questions you saw the financial implications behind each one and some of them, like the business insurance costs, changes with the addition of drivers. These are often areas where accountants with a greater understanding of the overall business picture need to help business managers understand the implications of particular decisions.

Business resilience requires revisioning and back-planning

Once established, these business-driver models can be used not just for short-term decision support, but also midterm and long-term business planning and forecasting. Business resilience comes from the business’s ability to be agile and adapt to changing times. Sometimes, those changes are extreme and unexpected, like COVID-19 or a natural disaster, and sometimes the changes are deliberate and planned, like a business’s strategic plan.

A key business resilience factor as we go into the future is how businesses re-envision themselves in a post-COVID-19 world. Does the business need to look different to be ready for the next pandemic — or whatever change may come next? Some may choose to go through a digital transformation to decrease their risk of disruption should we have to limit physical proximity again. Some that were primarily in-person businesses may decide to keep or shift to the online model — or go to a hybrid model where they are able to operate both online and in-person.

Rather than starting with where you are now, it’s better to start with what you want to look like in the future — your vision, and then do back-planning to figure out how you’re going to get there. Think of this as like planning a road trip. You don’t start with where you are and every time you hit another intersection, figure out whether to turn left or right. You start with where you want to go and then look at all your route options to get there, choosing the ones that are the most appealing or work within the constraints of your budget or time.

Accountants must help lead the way to a better tomorrow

We will work on the economic recovery for months (or, as some predict, years) to come. This provides a prime opportunity for accountants to step up to help lead both the short-term recovery and the longer-term building of business resilience. I hope that you will accept this mission and help us build a stronger economy by transforming finance into a change agent for a better tomorrow.

Donny C. Shimamoto, CPA.CITP, CGMA is the founder and managing director of IntrapriseTechKnowlogies LLC, a Hawaii-based CPA firm focused on innovation acceleration and risk management for small businesses, midsize organizations and nonprofits. He has been recognized many times as a Top 25 Thought Leader and Top 100 Influencer in the accounting profession.