What franchisees should be thinking about during the COVID-19 crisis

April 27, 2020

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Many franchisees were taken off guard by the COVID-19 pandemic, which was both unexpected and unpredictable. Because of the speed of which the pandemic impacted the franchising community, many franchisees did not have plans formulated, cash in the bank, or business processes set up to weather the duration.

In spite of the speed of this disruption, there is still the opportunity to make the necessary adaptions to make it through the crisis intact. Here are four things you should focus on:

1. Develop and analyze cash flow projections

In highly turbulent and unpredictable times, being able to effectively manage cash is critical. The key to cash management during a crisis is preparing and analyzing cash flow projections on a short- (daily), mid- (weekly) and long-term (quarterly) basis. These projections should look at the possible scenarios using base (reasonable) assumptions along with worth-case assumptions.

Creating a cash flow projection involves adding your sales and other sources of revenue and subtracting them from your expenses, such as your rent, utilities, payroll, franchise fees, taxes, loan payments, and inventory. Your projections should include the impact of tax deferrals, loan payment deferrals, any rent or royalty deferrals obtained, provincial and federal government incentives, and temporary or permanent layoffs.

By reviewing your cash flows, you will be able to identify fixed and variable costs as well as critical costs and vendors to determine where you’re spending the most amount of money. This can help you prioritize your spending. You should review all your current and future costs, and look at ways to reduce or delay any unnecessary spending.

Furthermore, you may identify that at a future point in time, you will run out of cash, despite your best efforts at prioritizing and reducing spending. This provides the information and support you need to seek to boost your liquidity. This may include obtaining financing, injecting shareholder loans into the company, or using any available lines of credit that only charge interest—which will give you a buffer and time to keep your business afloat.

2. Effectively manage your workforce

As the pandemic continues, you may need to make tough decisions about your employees, especially if your business is considered non-essential, and therefore operations cease, or are drastically reduced. As a result, you may need to reduce hours for some, lay off others, and look into work-sharing programs. In some cases, you will have to support your team members remotely in order to keep them productive.

The federal government’s work-sharing option is an Employment Insurance (EI) program that can help employers prevent layoffs. It lets them keep employees when there’s a temporary decline in sales that’s out of their control, such as the COVID-19 pandemic. Work-sharing can also help with costs as you won’t need to pay severance.

Also, the federal government has implemented two wage subsidy programs, for which franchisees that are still paying wages may be eligible. Wage subsidies may allow you to keep your employees on payroll, while minimizing the total outflows for your business.

If you must resort to layoffs, this may be an opportunity to lay off any low-performing employees.

At the same time, you may want to keep your key employees to avoid the risk of losing them in the future when the economy bounces back. Continued employment or using cash resources for stay payments can keep them content.

3. Conduct a strategic assessment

If you haven’t before, now is the time to look at ways to manage and reduce risks through a strategic assessment. If you have performed a strategic assessment before, you should clear off the dust and revisit it again in light of the current environment. Performing a strategic assessment can help pinpoint financial and operational risks. You will have to determine indirect and direct impacts, and follow up by creating an action plan.

This kind of analysis is crucial for your company. You will have to look your operations and how potential micro and macro financial implications will affect your business in the current economic environment. You will then need to analyze any new or innovative operational ideas to identify risk areas, and effectively manage these risks.

Innovative thinking has the potential to set you on the path to industry disruption, especially in times of dramatic change, such as the one we are currently experiencing. But on the flip side, badly executed creative ideas could lead to the collapse of your business. That’s why it’s important to ensure that your plans are well mapped out and thoroughly analyzed.

As the financial impact from the pandemic lessens, we will continue to see challenges and opportunities arise, and you will need to perform additional assessments based on new information. This will give you the ability to mitigate risks earlier. Look to your franchisor and fellow franchisees, industry associations, and other businesses in your network for support and guidance as you move through these ongoing changes.

4. Review your strategic options

When you have concerns about ongoing cash flows as identified in your cash flow projections or want to act on innovative ideas or plans, your stakeholders may be a source of cash or information.

You should discuss your financial situation with your key stakeholders—whether it’s your franchisor, shareholders, partners, lenders, landlord(s), or suppliers. The information provided should be concise because too much information may confuse them or take too much of their time. Ideally, your stakeholders should be updated frequently since they likely don’t want to be taken by surprise.

It may be important to talk to your lenders to find ways to get additional financing, reduce payments, or defer payments altogether. Your landlord(s) may be able to provide rent relief. And your suppliers may extend payment plans or cancel any pending orders. Some franchisees, such as restaurants, won’t need to order as much food so standing orders could be modified. Other types of franchisees might not need to order as much inventory or none at all depending on the level of services they provide. Your franchisor may offer concessions or other support.

For any changes or modifications to existing contracts, it will be important to look at all of your contracts and payment terms. It’s also critical to have any changes to them agreed upon and documented.

Your business might not exist without certain stakeholders and it’s important to build a good relationship with them. They have a vested interest in your success as well as a say in your company’s future. If stakeholders aren’t managed properly, there may be trouble ahead. Stakeholder management can include communicating often, asking for strategic advice, getting their buy-in, and nurturing and balancing the relationship.

Franchisees that have a respectful and mutual relationship with their stakeholders often have more stakeholder support and better strategic outcomes.

How BDO can help

Many franchisees are going through a very difficult time and it’s not currently possible to determine when business will return to normal. Our Franchising and Financial Recovery Services professionals have helped a number of organizations pivot and adapt to changing economic environments. Contact us to find out how we can help your business.

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