During a crisis period, many businesses transition from fixed expenses to variable ones
A pharmaceutical importer I spoke with this week said to me, “In the era of COVID, those who are smart enough to shift from fixed expenses to variable expenses succeed.” The truth is, he is right. The COVID pandemic created uncertainty in the international market and certainly in the Israeli market as well. “Take my industry, for example,” explained Ben Shikhi, “businesses that used to roll and manage quite well suddenly started feeling cash flow pressure with the outbreak of the COVID crisis. Suddenly, there were payment delays, shipments got stuck, but the expenses – what can you do, they continue to accumulate.”
This is not only happening in Israel but worldwide. In the field, managers in various businesses are forced to deal with uncertainty, for example, in managing their human resources. Questions like: should we lay off employees? And if so, how many? And if we suddenly need them again, how do we bring them back and for how long? These questions arise repeatedly with no definitive answers. And we haven’t even discussed the collection and delivery of goods, raw materials and products, storage, and inventory management. In short, it’s a significant headache and risk management. All of this directly affects these businesses’ ability to price their products accurately and ultimately impacts their bottom line.
The solution to difficulties and risks during a crisis may lie in changing the business’s management model and shifting from fixed expenses to variable expenses. What does that mean? Every business has expenses, which are the overall system of resources it needs to invest in to achieve its goals and objectives. These are the fixed expenses of a business, including electricity and water bills, rent, insurance, maintenance and operations, and, of course, human resources. These are the expenses that the business is required to pay every given month, regardless of its condition or what is happening in the external markets. In a period of uncertainty, when businesses need flexibility, it is very difficult and sometimes impossible to quickly reduce these fixed expenses and even more challenging to restore them to their normal level quickly when the business returns to regular operation.
Transitioning to variable expenses may be an excellent solution during a crisis and beyond. So what is the management of variable expenses? It means that the business only pays for what it needs and is not committed in advance to fixed expenses, regardless of its activity. “Transitioning to variable expenses provides businesses, especially during the COVID period, with flexibility,” explains Chen Goldner, the Vice President of Marketing at Fritz, specializing in supply chain management and distribution. “The business owner essentially buys insurance from us, and we manage the risks for them. We provide these businesses with operational solutions in a wide range of areas, and the managers get the rare time and peace of mind these days to invest themselves in the core activities of the business and organization. This is an important solution, especially in a period of uncertainty and market volatility.”
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