In the course of every business, economic shifts will present new challenges that leave leaders answering two pivotal questions for maintaining business continuity:
- How do we protect and maintain cash flow?
- What, if any, changes are needed to the workforce?
These two questions are tightly intertwined. Payroll and benefit expenses usually put the most pressure on cash flow, especially when business conditions become unpredictable. Taking a methodical approach can help contain those costs while also keeping a workforce in place to fuel cash coming in and to maintain customer satisfaction.
Decision makers who conduct regular workforce reviews are better prepared to maintain business continuity and performance when conditions become rocky. Those reviews show how changes to workforce structure and expenses effect cash balances. With these insights and options available, the finance team and HR team are able to work together to implement any needed adjustments. In other words, leaders must strike a balance between reducing labor costs and rising to the challenge of remaining focused on business continuity, especially when they must also identify new ways to serve customers.
Here are six ways to manage your workforce when cash flow is under pressure:
- Reduce or eliminate contract staff – By eliminating some or all contractor expenses, companies can increase cash balances quickly to maintain business continuity. The outsourced work can be either canceled, postponed or reassigned to employees to complete. While it may be challenging to re-engage with contractors once things return to normal, this approach does deliver immediate returns.
- Furlough workers – A furlough is essentially an unpaid leave of absence. It has an immediate and significant effect on cash because it does reduce all salary or hourly expenses from the balance sheet. However, it differs from a reduction in force in a couple of ways. First, it’s usually short lived. Second, most employers continue to offer benefits during the furlough period. In certain U.S. states, furloughed workers are eligible for unemployment benefits. Finally, using furloughs helps scale up the workforce rapidly when things return to normal without the additional time and expense of recruiting, hiring and onboarding new employees all over again. However, for businesses that have received loans under the Paycheck Protection Program(opens in new tab), (PPP) furloughing workers could make them ineligible for loan forgiveness.
- Reduce hours of operation in physical stores temporarily – If you have physical places where you sell essential goods or service, a temporary reduction on operating hours can save cash not only in overhead expenses but also payroll expenses. With fewer hours available comes fewer workers doing their jobs at the same time. This also provides a safer workplace environment. Reallocating store employees to other locations is an effective way to help fulfill online orders or provide curbside pickup service. With the money saved in operating costs, you can still serve your customers and may be able to reallocate cash to investing more in mobile applications or online storefronts in order to keep up with demand.
- Delay, defer or eliminate incentive compensation – When the business outlook become as uncertain as it is today, some employees would forgo any incentive compensation like bonuses or merit increases in order to keep paychecks coming in. Customers and suppliers are not affected by this change, and any cash set aside for incentive compensation can be reallocated to cover payroll expenses if needed.
- Temporarily reduce salaries –Asking everyone to take a little bit less for a predefined, short time, can help build stronger teams when everyone unites under a common cause and is willing to make sacrifices. Another added benefit to this approach is there is little to no disruption to your customers or suppliers. Companies can continue to provide products or services with a full staff but with less payroll expense. Salary reductions could also impact PPP loan forgiveness if they exceed 25% for any employee that made less than $100,000 annualized in 2019.
- Revaluate executive compensation – Executive salary is another area to examine if a quick influx of cash is needed for business continuity and to continue to serve customers. A temporary reduction in executive salaries can help fund payroll expenses for the workforce while building brand equity with employees, customers, suppliers and communities. Since executives are often compensated with instruments other than salary, most companies are able to make this reallocation of cash when economies take unexpected turns. Employees become more engaged and loyal when senior leadership takes altruistic actions.
There are more ways to adapt a workforce to changing economic environments to help stimulate cash flow. Here are the results from a recent NetSuite Brainyard survey(opens in new tab):
Every business is unique in how it manages cash flow and its workforce. Not every business will need to consider or implement these scenarios but reviewing and planning for some of them will be a helpful exercise even in the best case and necessary in the worst.
NetSuite offers a unified suite of financial, cash and human capital management solutions complete with workforce planning capabilities. Learn more about SuitePeople human capital management software(opens in new tab) and access a three-step guide on Managing Business Uncertainty(opens in new tab).