It is still a bit strange out there. I keep walking into office or retail facilities with no one to be found. I frequent a favorite restaurant or bar and there are only a few customers to be found, most of which I do not recognize. It is July and a LOT of people are still not working, or if they are, the job they came back to is not the same as the one they left.
Doing some reading and research on this RECESSION leads me to believe this recession is much different because 80+% of us now work in a service industry where the business is done face to face, compared to the non-service sector made up of the cyclical agriculture and manufacturing industries. This recession is being identified as a SUPPLY AND DEMAND DRIVEN RECESSION.
With an 80% service sector, the face to face component of the business goes to zero when people are forced to stay home or decide on their own to stay home for safety reasons. Thus, the service supply GDP disappears along with the related demand for goods and services because a significant number of service workers lost their jobs. While government programs and unemployment insurance helped stem the “consumption shock” those programs have a limited time cycle which will cause a second recession caused by additional fall-off of demand for non-service sector goods and related job losses. A DOUBLE WAMMY!
I saw a summary of this scenario in John Mauldin’s weekly newsletter (Thoughts from the Frontline dated June 26) and it goes something like this:
COVID shock- Decrease in Service industry revenues- Service and Non-Service Business Contraction- High Unemployment- Major Consumption Loss
So, what this means is that this recovery is going to take longer than originally estimated because:
- Many of the service businesses closed down
- The non-service industries that do business with service operations will find big holes in their demand for goods and services.
- People that can are saving more reducing consumption further.
- It will take a long time before people feel safe to go out and travel.
- It could take years to get back to where we were.
The point I want to make here is THIS IS NOT GOING TO BE YOUR NORMAL RECESSION RECOVERY. This is a new ball game with the repricing of every good and service. So, if you believe you will get through this like you did before that may not be the case. The old playbook may not work, and a new version required. Thinking about this further we should remove the word “may” and substitute “will” in the previous sentence.
We started out estimating the recovery for your industry at 18 months. That probably should be 24 months. And if the scenario above is somewhat correct you can expect a pricing battle, contract term changes and customer demands like you have not seen before, with every OEM and competitor offering off the wall pricing and terms for any meaningful business.
I then suggested you concentrate on work that improves your absorption percentage, working closely with customers to manage their recovery process, which could mean supplying products and services using out-of-the-box techniques. The key is keeping current customers, customize your services to meet their needs, find ways to bring “value-added” with every customer contact and manage customer credit to avoid material credit losses. If any of this means adjusting what you are providing now, then so be it.
As far as the new playbook is concerned the #1 goal needs to have enough cash flow to cover expenses and debt service. What you must do to get there may be ugly, but it must be done. In the past, you may have created “recession” revenue assumptions thinking “We will be out of this shortly so there is no need for major changes.” You cannot take that approach this time around. You must do your homework finding out how revenue streams have been impacted so far for both dealers and OEM’s and assume that level of revenue will stick around for at least 24 months. At the same time, you must expect negative margin results, with both the revenue and margin results causing reductions in cash flow if changes are not made.
Keep in mind that a dollar lost in this environment will take forever to recover. Thus, the need to rethink your entire operation from a cash flow perspective sooner rather than later. Managing your margins and cash flow are now the most important line items on your agenda. Managing the balance sheet is #2 on the list. Whatever it takes is on the table. People, locations, contracts, expenses, pay cuts, and cost-sharing will most likely have to be considered and implemented to generate positive cash flows.
We began thinking that this pandemic would have a limited impact on the economy and your business. But we what we know now in terms of chaos in the service sector, and how that will impact your customers in the non-service sector have to be considered for planning purposes. This process will be good for you, your employees, and your banking situation. Expect your solutions to be really ugly. If they are not, go back to square one and start over.
Garry Bartecki is a CPA MBA with GB Financial Services LLC. E-mail editorial@mhwmag.com to contact Garry
