How to Calculate COVID-19 Operational Spend (And Why It Matters)
From T-Mobile’s $50 million cleaning bill to Walmart’s $3 billion spent on added “pandemic” salaries, COVID-19 has directly impacted operational spend across industries, business sizes, and markets. Unsurprisingly, CFOs note “financial impact” as the single most worrying component of the mid- and post-COVID-19 ecosystem. It’s hard to prepare for a black swan event. It’s even harder to understand the complete scope of your pandemic spending and how it relates to your overall financial outlook.
So, how do you calculate these new, acute, and possibly short-term costs? Better yet, how do you roll these costs into budgetary planning, BI tools, and growth calculations?
The Common Operational Costs Associated With COVID-19
Every CFO is facing unique COVID-19-related cost structures. The liquidity and capital your business puts towards COVID-19-specific costs will be primarily driven by your risk appetite, industry, size, and regulatory requirements. Let’s cover a few of the most common COVID-19 costs. While there are thousands-upon-thousands of additional tangible and intangible costs we could list, this list is generic enough to apply to most CFOs. You will still need to do a deep dive and calculate your unique operational costs.
With operational expenses increasing by 1,000% in the middle of the pandemic, loading up on protective equipment cost businesses a significant amount of capital last year. Chances are, your business has some form of operational expenses — especially if you followed CDC safe workplace guidelines.
Supply Chain Friction
Ninety-four percent of Fortune 1000 companies saw supply chain disruption during COVID-19, and 74% of CFOs admit that supply chain issues negatively impacted their bottom line. Supply chain ops quickly became one of the most costly components of running a business during the pandemic. Also, virtually every company saw increased fulfillment costs, delayed orders, and vendor disruptions.
Eighty-three million people were impacted by canceled events in 2020, and 87% of businesses were forced to cancel or postpone their mission-critical events. The costs associated with these cancellations can be measured in time committed to preparation and planning, as well as lost leads, time, and resources.
CDC guidelines forced many businesses to invest in a swarm of safety equipment. From plexiglass barriers to professional cleaning services and store partitions, safety costs rose significantly in 2020. The Wall Street Journal notes one food distributor that spent over $20 million on plexiglass alone. All of those equipment costs should be calculated.
Fifty-four percent of execs plan to reconfigure office space. While it may seem strange to include office space as a “new” expense, you may have empty offices that require upkeep. If you went remote, office space is now a COVID-19 expense. You’re not using it, and it’s costing you a pretty penny.
According to PWC surveys, 98 percent of businesses had many or most employees go remote during COVID-19. There’s a good chance you invested in hardware, software, and networking solutions to bolster your security in this new and frightening remote landscape.
Other common expenses include travel for audits, increased utilities, capital improvements, and insurance. Remember, each business has a unique COVID-19 cost structure.
Hint: You may be able to recover some of these added costs.
How to Calculate COVID-19 Operational Spend
The easiest way to calculate COVID-19 operational spend is to add every COVID-19-related expense together. For example, that may be PPE + costs associated with supply chain disruptions and late orders + safety equipment + office space + canceled event costs = COVID-19 operational spend. You can go about this in two ways.
The first method involves calculating ALL COVID-19 related expenses. This will likely include things like new software, hardware, and supply chain relationships. Alternatively, you can only calculate COVID-19 expenses that are short-term. So, what’s the difference? The first method, which calculates all costs, gives you an understanding of your total overall operational spend in the context of previous years. This is great for understanding cash flow and capital. The second method, which involves only short-term expenses (like operational expenses, safety equipment, and canceled events), gives you an idea of how much of your spending is short-term and likely to drip off over the next few years.
Both calculations are important. The difference between both sums gives you an idea of how much COVID-19 has changed your long-term operating costs. In other words, what your “new normal” of operating expenses is. Better yet, you can take last years’ operational spend, add it to the difference between your two COVID-19 operational cost calculations, and discover how much you can expect to spend on operations once the pandemic subsides.
There’s a good chance your operations expenses increased in 2020. Even more, there’s a good chance they’ll stay up during 2021. That’s okay! According to McKinsey, around 90 percent of successful companies during COVID-19 said new digital experiences, partnerships, and business models are to thank for their growth. So, increased operational expenses may be the buffer between growth and shrinkage. You don’t need to panic when you see the numbers.
Calculating COVID-19 Expenses Today Positions You for Growth in 2021
The good news is this: 61 percent of companies believe that global economic conditions will be improved in 6 months. The bad news? You likely spent a significant amount of capital on operational expenses to keep afloat during the pandemic. By calculating your operational expenses now, you can get a heartbeat on your overall expense structure in 2021 and how it will likely evolve as we head into 2022.