Suttle & Stalnaker, PLLC is pleased to publish this four-part series providing guidance to the energy sector as we navigate the COVID-19 pandemic and beyond.
Chris Deweese, CPA, CGMA
Member, Suttle & Stalnaker, PLLC
If you are in the energy market, you already know what recent market conditions and COVID-19 have done to the revenue side of your income statement. Whether in coal, natural gas, or oil, all sectors of the energy industry have been crippled by slowing demand and, in some cases, a significant reduction of revenue.
Whether you are in the core industry or a supplier to one of the core markets, more than likely your income statement has been in a downward spiral. Ultimately, if not already impacted, your cash flow will follow the results of your income statement, and we all know that during these times cash is king! Now, more than ever is the time that you need your CPA and need to revisit your income statement and costs.
Below are just a few ways to begin thinking about changes to your income statement in an effort to survive the downturn.
Benchmarking
Benchmarking is a great exercise if you can find similar data to utilize in making the comparison. Comparing to peers and/or other industry leaders can result in some high-level analysis that highlights areas where you may want to focus in on costs or metrics that are out of line with the industry standards. Benchmarking on a year over year basis with your own financial numbers can identify trends in rising costs that, when managed, can achieve different results.
General Insurance Costs
Historically, insurance costs continue to increase on a yearly basis regardless of the operations of the business. Consider annually rebidding general liability, property, and other insurance needs. Do not be afraid to change up the relationship and help keep the insurance carriers in check as it relates to their cost.
Health Insurance
For a large number of labor-intensive industries, health insurance continues to increase substantially on an annual basis and can be one of the highest cost on the expense side of the income statement. Revisiting your health insurance coverage and rebidding these services, if possible is a great way to save or reduce the overall cost in health insurance costs.
In addition, looking at various options with the plans such as raising deductibles, self-insuring a portion of the deductible and/or self-insuring for a portion of the plan can also result in reduced costs. Consider utilizing health savings accounts (HSA) or health reimbursement arrangement accounts (HRA) depending on your specific circumstances.
Outsourcing
Outsourcing can be looked at both ways. Sometimes you can outsource a function such as human resources, internal audit, accounting, information technology, or even contract companies and save a significant amount during this time with limited disruptions. Conversely, you can revisit the cost of currently outsourced functions to determine whether it would be cheaper to perform the function in house.
Rebidding Contracts
Whether its supplier contracts, administrative contracts, transportation costs, etc., rebidding contracts during downturns can result in significant savings. The industry suppliers understand that some of the downturn during these periods will impact their pricing and many adjust accordingly. You can also reach out to large suppliers for price discounts and/or extensions of payment terms to help address cash flow issues during the downturns.
If you are in long-term contracts that are not advantageous to your business in the current conditions, consult legal counsel regarding the use of force majeure clauses with COVID-19 to determine whether you have any flexibility for renegotiating.
Travel Costs
COVID-19 has changed the way we travel, interact, and conduct meetings. Spending a few dollars in the technology arena today can result in a significant amount of savings in both out of pocket expenses and time in the future. Using platforms such as ZOOM and WebEx can help create efficient face-to-face meetings that result in reductions of both travel costs and time away from the office.
Technology
Technology innovations continue to transform our world not only due to COVID-19 but also through the general use of technologies in every avenue of our business. Consider challenging the status quo and consider what functions of your business can be more automated and how technology investments could ultimately reduce the overall costs of doing business in not only the short-term but also the long-term.
Idle Capital Assets
Idle capital assets are painful to have on the books during these downturns, especially when you are still making payments on a monthly basis. Review these assets and determine if you have a business reason for keeping them in the future. Are there other options for use of those assets or can you help to diversify your business by putting these assets to work in other industry niches.
Bonus vs Raises
As costs on an annual basis continue to escalate, one way to consider holding down base costs is utilizing bonuses versus annual raises. Every time the base rate increases through a raise, this cost will continue to grow on a year over year basis. By using bonuses for good years with no raises, you will help to keep base rates at a consistent amount over time.
Assign Accountability
During downturns, one of the most important pieces to surviving and making changes to reduce costs is to assign accountability to specific individuals. If individuals are required to submit cost-cutting plans, you create accountability that will ultimately bring you results. Give them incentives to be creative, engage all people in their respective departments, and leave no stone unturned during the process. Surviving the downturn and using it to make the Company leaner will result in more profitability both currently and when the industry returns to normalcy.
In our next article, hear from Suttle & Stalnaker member Tricia Clark on how to best address outstanding debts, whether accrued before or after the COVID-19 pandemic, while moving your business forward during this uncertain time.