During this critical down time of our business : Cash flow breakeven or P&L breakeven?

It has been a while since my last article and guess what? We as a firm providing acting CFO services to fast growing new economy and technology driven SMEs – we are quite busy in the past few weeks.

With the virus hitting our businesses hard, a lot of our circle of friends are looking for ways to survive.  Well the tricks are easy to understand (yet hard to implement perhaps).  In our old Chinese saying – “As long as we can keep the green mountain alive, we won’t be afraid for lack of firewood from the mountain”(in Chinese:留得青山在,不怕没柴烧 ).

Trying to keep our businesses going as “usual”, first let me define it.  Since the business activities of our clients are down and their sales are down, therefore we need to conduct a cost reduction measures scenario analysis for most of our clients.  I would like to tackle these problems using a matrix analysis.   There are 2 methods with 3 time frames for the major analytical framework which I would like to share here for discussion purposes.

Before we as business owners are to carry out any drastic moves, we need to realistically check on how our business is going to breakeven even under such an adverse environment.  And with the subsidized savings from government (our Hong Kong office in Science Park has offered a 6-month rent reduction); or the landlord (our Shanghai office in “静安” offered a waiver of 2 months’ rent), we always have some confusion on whether it is a “profit & loss” saving or a “cash flows” saving?

Therefore, we need to be super clear about our profit & loss situation first, before we look at the cash flow situation.

There are 2 boxes that will require our immediate attention and they are 1) the short term cash flow breakeven and 2) the long-term profit & loss breakeven.

The immediate action that we have advised our servicing clients to take to save cash flows is to DELAY the rent, asking our staff to take unpaid leave and stop incurring entertainment and traveling expenses.

On this point we certainly acknowledge that many employees at companies big and small are worried for their jobs.  And some large public companies with bigger balance sheets have even pledged not to reduce headcount as a result of the virus situation.  For our clients which are SMEs, they on the one hand being a small company see their employees often like family and so any cuts to staffing are particularly painful.  Yet on the other hand, from a practical perspective they also realize that a company which cannot survive is unfortunately not going to be able to employ anyone.  Unfortunately, tough choices have to be made.

We will urge our clients to immediately look at how to create the same amount of revenue while using less resources.  Or this is what we call increasing the efficiency. However, for most of our new clients (whom we have not been providing CFO services) they will not be able to show us a concrete view on whether they are making money for each of their projects.  And they even allow the business unit to run in deep loss and they are hoping the other offices are earning enough to cover their loss.

No …. This is not going to work anymore.

For Hong Kong and China based companies, making February cash flows breaking even is key and most of us can make it through.  However, if we do not take active planning on how to make the business work in the long run, that is : to ensure every project makes a little profit to cover the fixed costs (payroll and rent)) in the long run (starting around May or June and all through the following months of 2020).  This profit-making plan will require detailed analysis on revenue from each project vs the cost to be incurred in these projects and check the amount to be “earned” via each project.  In order to achieve a yearly profit – the only way seems to be either increase the profit from each project (because it will be difficult for us to get more projects) or to reduce the fixed costs, or to do both.

From March to May we should take pro-active steps to lessen loss-making activities and target for breaking even in a month or so.

Since some of our business contracts such as leases (you may want to move to a cheaper place), and the marketing and promotion contracts may only end in a few months, it will take us a lot longer than we think in order to make it to profit & loss breakeven.  There are other very practical cost cutting solutions (but not welcome by most of us) such as terminating some of the non-profit generating units (such as legal and accounting) and move them to third party firms.  Many of my friends are calling me up to see how can I utilize my professional accountants’ crew to help out in their day to day accounting and finance functions’ needs.

The mid-term actions for SMEs in Hong Kong making cash flows breakeven include applying for government backed loans from banks in Hong Kong.  There are at least 2 kinds of loans that we have helped our clients and ourselves in applying for.

The first kind is 80% of the loan backed by the Hong Kong government and it will require the company has the past records of making profit and with a set of audited financial statements.  The level of the amount of loan varies but it is expected to be in the HK$3 million to 6 million range.

Last week, the Legislative Council has passed another program for quick loans for SMEs in Hong Kong and once the SMEs show to the bank the MPFs and payroll payments evidence and the lease and payments.  The maximum amount of the loan is 6 times the monthly fixed expenses and it has a cap at HK$2 million.  Since this loan is 100% guaranteed by the Hong Kong government and the rate is only around 3 %.  It will be expected to be super helpful to the SMEs.

For long term cash flows breakeven goal – we will need to sit down with each of our clients to advise on how to change the business partners’ relationship.  One of our consulting clients may try changing their salaried employees or consultants to “freelance” consultants with a very low base compensation point with the chargeable hours as part of the remuneration.  This will help the consulting firm keep the brand within a few partners who are supplementing the running costs of the business and turning the whole cash flows situation into a much better positive position.

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