From Cfo.com: Businesses around the country are preparing to reopen as local stay-at-home orders are lifted. But the world looks a lot different than it did a mere three months ago, and many companies must now adjust to a yet-evolving new normal. While companies now understand how the COVID-19 pandemic has affected their operations, the dust is still settling on the short-term impacts of the crisis and what business will be like in the long term.
As management contends with important changes to the business, such as supply chain disruptions, headcount reductions, and long-term work-from-home policies, chief financial officers and other finance leaders are sorting through the resulting accounting and financial reporting impacts. Here are five areas for companies to keep in mind as they prepare to reopen and maximize value in a post-pandemic operating environment.
As local reopening guidance is issued, companies will have more visibility into when and how they can resume production and operations and formalize their reopening plans. Management should ensure these strategic decisions are communicated to its finance teams on a timely basis. This information will allow financial planning & analysis (FP&A) leaders to accurately forecast the impacts that reopening will have on revenue, margins, and costs.
Additionally, accounting leaders will need this information to ensure the company is properly accounting for these strategic decisions. For example, an entity may be expensing certain overhead costs associated with production facilities during the shutdown that were typically allocated to inventory and capitalized during the normal course of business. Once companies resume production, they must ensure these costs are appropriately capitalized.
Further, once FP&A teams are able to digest updated operational plans and develop new business forecasts, companies should ensure consistent communication of updated, accurate forecasts to accounting leaders. Accurate forecasts will be crucial for updating a number of critical accounting estimates, including impairment models, stock compensation, contingent consideration, and deferred tax assets.
Shedding noncore or underperforming assets is common during times of distress. The negative financial impacts many companies have recently experienced may have them considering divestitures as they work with sponsors and lenders to ensure the stability of the company going forward, whether that be through obtaining additional funding or as part of a bankruptcy process.
Most corporations are set up to buy businesses, not sell them. Companies that are successful in the divestiture process have dedicated teams devoted to selling, and these teams utilize robust de-integration plans. With the pace and volume of divestitures potentially accelerating in the current environment, companies that do not have the teams, processes, and information at their disposal may run the risk of not maximizing the value of the assets they are selling.
Fortunately, the appropriate data to fully understand the financial health of each of its divisions or product lines may be readily available as a result of other recent data-gathering activities. Accounting and FP&A teams have likely spent significant time and effort over the past months gathering and evaluating data for both strategic and financial reporting purposes.
Datasets from exercises such as impairment testing and going concern analyses should be proactively communicated from finance teams to operational leaders to ensure they have the full suite of information to support strategic decision-making.
Real Estate Expenses
The ongoing mass experiment with remote work has many companies considering permanent work-from-home plans for portions of their workforce to reduce future office space and rental expenses.
Organizational leaders considering putting together a smart real-estate footprint analysis to evaluate the impact of these changes should work closely with their finance and accounting teams. Comprehensive lease information to complete such an analysis, such as lease terms, payments, penalties, and location data, may be readily available and well organized as a result of work completed or in process to adopt the new leasing standard, ASC 842.
When evaluating what savings may look like from reducing a real- estate footprint, companies should also assess the likelihood of additional costs associated with this change. Investments in technology to enable employees to maintain productivity from home, negotiated penalties or costs to break a lease, or sub-lease rents that are below the rate of the current lease payments are just a few costs to include in such an analysis.
Broken supply chains have been a defining feature of the current crisis, as is evidenced from any grocery store visit or perusal on Amazon. As businesses begin to reopen, they are likely to continue feeling the effects of this disruption as they struggle to meet both current and backlog demand. As a result, many companies are revisiting their inventory management strategies to ensure they can avoid future issues.
Before inventory changes are made, companies should understand the potential impacts on their margins, cash flow, and forecasts. These changes may include moving away from a single supplier, which will yield higher costs when purchasing inventory, such as fewer discounts and higher shipping costs. Another change may be moving away from just-in-time inventory management systems, resulting in increases in inventory balances and negative impacts on cash flows. Companies may also decide to diversify their storage capabilities, placing inventory in more dispersed or easily accessed locations.
Some companies may incur one-time costs as they manage through the crisis and its aftermath. These costs may include severance resulting from headcount reductions or event cancellation fees. Alternatively, costs incurred to purchase new supplies (i.e. masks, cleaning supplies) or maintain higher workplace health standards and keep employees safe may be considered recurring if companies need to purchase these items as part of normal operations going forward.
Management should take steps to understand the net new costs they will incur upon reopening, to determine which costs are one-time charges and which costs are now part of normal operations. To the extent that companies expect these costs to be one-time occurrences and excluded from earnings before interest, taxes, depreciation, and amortization and other non-GAAP measures, management must ensure it is in compliance with the SEC’s disclosure requirements and is consistently reporting these items.
Drew Niehaus is a managing director at Riveron, where Jenn Braden is a manager.