COVID-19 is forcing firms to make difficult spending decisions as they deploy their resources amid unprecedented market turmoil. Here’s how to get your spending strategy right.
Crisis management is about marshalling resources and deploying them quickly to where they will have the greatest impact. During the 2008 financial crisis, the firms which survived and later thrived were those that were quickest to achieve balance sheet flexibility.
Writing for McKinsey & Company, Ankur Agrawal, Stefon Burns, Kyle Hawke and Matt Jochim say the most successful companies “achieved three times the improvement in operating expenses as a percentage of revenues than their ‘non-resilient’ peers”. Here they explain how you can design a selling, general, and administrative expenses (SG&A) strategy for the COVID-19 era.
MAKE YOUR ACCOUNTS VISIBLE
“Better visibility leads to better dialogues, choices, and trade-offs.” COVID-19 creates some obvious savings – some areas of production, employee travel or office running costs, for example. To identify and capture those savings, address shortcomings in your IT and financial reporting systems and encourage employees to be fully transparent about what their spending needs really are.
Studying previous expenses gives you insight into where your actual spending deviated from your budget, but the best visibility is the kind that helps you decide where to spend your money before it’s spent.
Forward-looking spending strategies are data-driven, ROI focused, and allow for reallocation of investments “across channels and geographies as consumer sentiment changes in specific markets”. But such strategies won’t work unless staff have the capacity to respond to demand, redeploy, and carry on working or selling – you’ll need to invest in “cloud computing, videoconferencing and other remote-work technologies”.
The uncertainty of outcomes surrounding the pandemic means planning for multiple scenarios. To achieve consistency, design “standard forecasting templates or tools, which are easy to aggregate and make comparisons across functions and geographies”. You’ll also need to factor in a way of challenging spending plans perhaps through a “spend management team” whose remit is to review purchase requests.
When demand is unpredictable, so are your costs. The best way to manage this uncertainty is to design a spending strategy based on data coming direct from the coal face. There are two ways to do this, both of which merge financial and operational plans “to eliminate duplicative work and keep the two plans in sync”.
- Driver based plans calculate the budget in response to demand, productivity and price per unit. Budget mirrors demand.
- A zero-based approach begins each accounting period with a blank slate. Managers consider their budget needs for each period and make a case for them. Funds are allocated on the basis of immediate and strategic priority fed from the bottom of the organisation to the top.
DYNAMIC RESOURCE ALLOCATION
Decouple your budget for essential spending from that portion of your budget which you can allocate to strategic priorities, short or medium term opportunities, or in response to external disruption.
1) Essential spending: “If I don’t spend this for two years, will we lose significant sales or market share?”
Minimise essential spending by making it more flexible:
- Opt for flexible contracts with service providers.
- Create “tiered service levels” to prioritise key contracts or accounts.
- Reset the balance between external sales staff and internal sales teams.
2) Strategic spending: On a quarterly or even monthly basis, consider spending proposals on a case-by-case basis, pooling funds and allocating them “until [you] run out of ideas or the fund is depleted”, or by running workshops to discuss “productivity proposals across businesses and functions”.
FUTUREPROOF YOUR NEW STRATEGY
Your new SG&A strategy is working – now is the time to embed it into your organisation for the long term. Begin with training: you need a workforce that operates flexibly – a talent pool of individuals who can be redeployed between business functions as required. In order to oversee these talent pools, you may also need training: ”For everyone opportunities for up-and-reskilling will aid retention and transition as redesigned processes enable people to focus… more on valuable decision-focused skills.”
The COVID-19 pandemic is uniquely challenging for companies, but it also presents a huge opportunity to embed an improved budget strategy and new ways of working that will see you thrive as order begins to replace the current chaos.