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  • Juanita Schwartzkopf

How Do You Effectively Analyze Q1 and Q2 2021 Financial Performance?

Focus Management Group - Q1 and Q2 Financial Performance

This article first appeared on SFNet's "The Secured Lender - Featured Articles"

Analyzing Q1 and Q2 financial performance is challenging. 2020 was impacted by Covid-19 both positively, through the stimulus programs, and negatively, as a result of shutdowns and stay at home orders along with their trickle-down impacts. 2021 financial performance analysis is further complicated by the emerging trends of labor related issues, inflation impacts, commodity prices changes, and supply chain concerns.

How much liquidity did government programs provide?

During 2020 and 2021 the government stimulus programs provided over $1.1 trillion in funding to businesses. This dollar amount does not include the impact of the employer tax deferral program and the employee retention credits (“ERCs”). The amount does not include funding to airlines and other beneficiaries of specific programs, nor the funding direct to consumers. This is the amount that went to the small to medium sized businesses under a variety of programs identified in the chart below.

Focus Management Group - Q1 and Q2 Financial Performance

The largest government program was the Payroll Protection Program (“PPP”) with 5.1 million loans totaling $522 billion in 2020, and 5.7 million loans totaling $260 billion in 2021, for a total of $782 billion of potentially forgivable SBA loans. The next largest program was the Economic Injury Disaster Loan (“EIDL”) which provided $200 billion. The agribusiness, food processing and rural areas benefited from $1 billion in loans to support working capital under the B&I Cares Act loan program, and $5.5 billion of USDA purchase programs to support food bank and food box programs. The healthcare industry received $76 billion of funding in three phases under the Provider Relief Fund program. The Restaurant Revitalization Fund provided $28.6 billion in liquidity to the restaurant industry, and the Shuttered Venue Operators Grant Program added $16.25 billion of liquidity to that industry.

In addition to these programs that were quantified, employers were able to improve liquidity through the use of the payroll tax deferral program which moved the employer portion of 2020 tax liability into 2021 and 2022. And, if a company qualified for the Employee Retention Credits, an employer could receive up to $7,000 per employee per quarter in relief from 941 tax liability in 2021. The impact of those programs has not been quantified but is certainly significant.

As a result of these programs, more than $1.1 trillion of liquidity moved into businesses. This allowed some businesses to reinvent themselves, provided time for others to fix their performance programs, masked ongoing performance problems that were not addressed, and provided other businesses with a store house of liquidity.

Understanding how each company was impacted by these liquidity events is key to analyzing performance in 2020 and evaluating future prospects for 2021 and 2022. It is not enough to know the dollar amount of the impact. To evaluate a company’s performance accurately, it is also critical to understand how the liquidity events were accounted for in the financial statements.

To the extent a company did not use this liquidity to fix their performance problems, reinvent themselves, or store liquidity for the future, 2021 may be a difficult year. Performance issues have begun to surface in Q2 2021 and may accelerate.

Evaluating emerging trends is key to evaluating a company’s future prospects!

The emerging trends to consider are:

Focus Management Group - Q1 and Q2 Financial Performance

The combined impact of these emerging trends varies by company, but each company will be impacted in some way. Reviewing Q1 and Q2 financial performance will require comparison to historic performance, but just as importantly will require due diligence related to these emerging trends.

Labor Shortages

As of May 2021 there were 9.3 million job openings and 9.3 million unemployed, or 1.1 unemployed people available for each job opening. This tight labor market differs by geographic location and by skill sets required. Each company will experience different labor availability based on where the company is located, where the employees can be located, and the skill sets required to fill the open positions.

Employers have found it necessary to provide hiring bonuses, stay bonuses at regular intervals, increased hourly pay rates, reduced employee contribution to benefits, increased benefits offerings often including education benefits, higher hourly bonus rates for less desirable shifts, days of the week or locations, and employee referral bonuses.

This impact may sound minor but could have a major impact on financial performance and EBITDA. With labor costs being a significant portion of a company’s cost structure, even minor changes to hourly rates and benefit structures can have a material impact on the financial performance of the company.

Consider a company with 258 employees with an average hourly rate of $14.00. A 10% increase in labor costs would allow the company to achieve the $15.00 average hourly rate often referred to in the news. A 15% increase in labor costs would bring the average hourly rate to $16.10.

Using the example of a company with $50 million in annual revenue, expending approximately 15% of revenues for labor and benefits with a strong EBITDA performance of $3.5 million and a fixed charge coverage ratio (“FCCR”) of 1.32, labor cost increases could have serious negative impacts.

A 10% labor and benefits increase would reduce EBITDA to $2.75 million and the FCCR becomes 1.04. The company would be able to continue to service its debt with this level of increase in costs. Key to this FCCR performance is that no other costs would be able to increase as a percent of revenue.

A 15% labor and benefits increase would change the performance of this company dramatically and it would not be able to service its debt based on current lending terms.

Businesses are feeling considerable pressure to find and retain employees, which puts pressure to increase hourly rates and benefit plans at the top of mind. If management does not understand how minor changes can impact performance, the company and the lender could be surprised.

Companies need to explore all the tools they may have at their disposal. To improve performance and offset increased labor costs, the company could:

  • Increase sales prices.

  • Reduce nonlabor related costs.

    • Reduce locations for example.

  • Increase automation.

    • Evaluate return on investment, and additional debt requirements.

  • Analyze a trade-off between hourly rate changes, benefit increases, and overtime dollars.

  • Outsource labor or materials to a lower cost producer.

  • Improve the operating cycle to reduce the need for debt, and related interest expense.

Changing Work Environments

The labor issues are further complicated by the changing work environments. Businesses are evaluating work from home (“WFH”), return to office (“RTO”) and hybrid work schedules. Within hybrid schedules some companies are allowing employees to select whether they have a designated office that others cannot use or a shared designated office based on selected days in office and days working from home.

These work environment decisions involve evaluating the cost structure by location, including utilities, rent and taxes. The number of locations may change, or the size of each location may be impacted.

Changing salary levels are also being scrutinized. Some businesses have suggested reducing pay if an employee no longer commutes to the office or the employee is now located in a region with a lower cost of living.

The changes to salary levels are complicated by the labor shortage issues an individual company is experiencing.


While politics and the news from day to day address the topic of inflation with a degree of hysteria, companies and their lenders need to be aware of the possibility of inflation and work to understand the impacts and minimize the risk to financial performance. A business cannot operate in a constant state of fear about outside influences. But a business can develop strategies for monitoring impacts and for dealing with uncertainty.

The simplest definition of inflation is the decrease in purchasing power of a currency over time. This decline in purchasing power is measured by an increase in average price levels for goods or services over a period of time. The US Bureau of Labor Statistics (“BLS”) tracks both a Consumer Price Index (“CPI”) and a Producer Price Index (“PPI”), and reports on these at least monthly. Over the twelve months ending May 2021 the all-items CPI index increased 5.0% before the seasonal adjustment, representing the largest twelve month increase since August of 2008.

As the economy recovers from the impact of Covid-19, concern has turned to inflationary pressures resulting from increased economic activity, stimulus programs, and new government spending proposals.

Companies need to employ best practices in terms of managing their client relationships. This involves understanding:

  • Profitability by customer.

  • Profitability by product.

  • Profitability by location or division.

Without an understanding of profitability in this level of detail, a company is not able to make the changes necessary to continue to generate profitable operations and service its debt.

Contracts with vendors need to be evaluated for the potential to lock in input costs for a period of time, and for the potential that vendors will increase prices.

Contracts with customers need to be evaluated for the potential to increase sales prices as a commodity price increases, or if inflation exceeds a certain percentage.

A successful company will be one that is clearly able to analyze profitability by customer, product and division, and make appropriate operating cost changes as needed, with the ability to pass along cost increases when contracts allow.

The second area to address is working capital management. This involves accounts receivable (“AR”), inventory, accounts payable (“AP”) and the line of credit.

Inflationary pressures will result in companies experiencing pressure for extended payments from customers who are experiencing the same impacts of inflation, and pressure for faster payments to suppliers from vendors who are also having price increases. Just as Covid-19 impacts forced successful businesses to intensely manage their working capital in both directions, inflation causes the same issues.

Inventory levels may need to be increased to protect against unusual price swings or to allow better matching of costs to produce to revenues.

The impacts on AR, inventory and AP put significant pressure on the line of credit. In some cases, while the working capital management is successful, the overall size of the line of credit may be limited by a borrowing cap which is below the collateral at the new price levels.

To address this, a company needs to be monitoring and reporting on price and volume variances. When inflationary pressures are weak, this type of analysis and reporting may not be as critical as it will be going forward. Companies need to be able to identify what amount of the change in revenues or the changes in costs are attributed to volume changes versus attributed to price increases. Without this level of analysis and understanding, a company will be unable to clearly articulate line of credit needs and the explanation for the changes required to continue to operate.

Commodity Price Changes

Commodity prices are believed to be a leading indicator of inflation. Changes in commodity prices reflect systemic shocks, such as hurricanes or, in 2020, systemic shocks such as Covid-19.

The strongest case for commodity prices as a leading indicator of expected inflation is that commodities respond quickly to widespread economic shocks.

When considering the impact of commodity price changes there are micro economic impacts on individual companies. Costs of inputs can change overnight for a business that relies on commodities as an input, and revenue prospects change overnight for a business that produces the commodity. For example, the price of corn increased from a $4.00 per bushel average from 2014 to 2019, to over $6.00 per bushel in late 2020. The recent peak corn price was $7.73 per bushel on May 7, 2021, with the price as of June 21, 2021 at $6.61 per bushel. This price change is a negative for industries that use corn as an input, but has a significant revenue benefit for those that produce corn.

Commodity changes also impact certain industries more dramatically than others, and have macro economic impacts. For example, the price of oil was $59.41 as of March 31, 2019, $25.32 as of March 31, 2020, and $61.45 as of March 31, 2021. These price changes definitely impact the producers of energy and the companies that serve them, but the overall economy is also impacted by increased fuel costs which increases the cost of transportation of products and services to market.

The economy is complicated and, therefore, analysis of an individual company’s sensitivity risk to commodity price changes is key to a successful performance evaluation.

Supply Chain Concerns

The US manufacturing sector continues to grow. GlobalTranz Enterprises, a third party logistics solutions provider, surveyed US supply chain leaders. That survey showed optimism related to supply change performance, but noted challenges with “final mile”/home delivery issues, increasing transportation costs, and staffing/workforce issues. Only 1 in 10 of the decision makers reported a pessimistic outlook of their company’s revenue in the next three to six months, and even a year forward.

The Institute for Supply Management (“ISM”) reports the May supplier deliveries index — which rises as lead times for inputs increases — rose to its highest level since 1974 with lead times for production materials reaching a record 85 days. The supplier deliveries index is an inverse index, in that a reading above 50 percent indicates slower deliveries. The index typically rises as the economy improves and consumer demand increases.

To deal with these concerns, companies will need to:

  • Consider alternative suppliers.

  • Evaluate reshoring and near shoring.

  • Consider alternative transportation options.

  • Further evaluate staffing planning.

  • Consider warehouse sizing.

  • Evaluate the need for technology investments to ensure data availability.

Evaluating Q1 and Q2 2021 Performance, and Future Prospects

Evaluating Q1 and Q2 performance requires consideration of the impact of the stimulus funding in conjunction with the emerging trends. A review of 2019, 2020 and 2021 needs to be considered rather than year over year performance to provide clarity on the impacts of stimulus programs, and to provide a base for sensitivity analysis. With the low levels of inflation in recent years, it has not been as critical to evaluate sensitivity to inflation and commodity prices. That has now changed. The further complications from labor shortages and labor costs increase the complexity of evaluating future performance.

To facilitate the analysis of labor cost impacts on financial performance, it will be necessary to:

  • Identify wages and salaries, in COGS and SGA, both as $’s and as %’s. Also identify benefit costs per FTE and as a % of revenues.

  • Determine FTEs at each quarter end. Calculate revenues, gross margin and operating profit per FTE.

The impact of the stimulus programs and the financial statement reporting methods for those programs will need to be considered related to labor and benefits. This analysis should include PPP loans and related forgiveness, ERC utilization, and grants received under EIDL programs, and shuttered venues and restaurant revitalization programs.

An individual company needs to consider the availability of needed labor. This includes skill levels available and their impact on efficiency, upward wage pressure, and location changes to improve labor availability and rates.

A thorough understanding of how the company has already changed, or is anticipating changing, its physical locations and the cost impact going forward needs to be considered. It is also important to determine if lease and rent deferrals were granted and what the future run rate for location related expenses will be.

As part of this evaluation questions related to the WFH, RTO and hybrid work schedules should be asked.

  • What is the company expecting in terms of return to office locations?

  • Are work from home programs or hybrid work plans being implemented?

  • If so, are wages changing to be tied to lower cost locations?

  • Are wages rising to attract employees?

To deal with inflation and commodity prices, best practices are the key to performance. Companies need to be evaluated based on their use of best practices for customer and vendor practices, and for working capital management. Successful companies will consider client relationship management, including profitability by customer, by product, and by division or location. Successful companies will evaluate and develop ways to flex prices charged to customers and lock in or hedge prices paid to suppliers. Working capital management, including sizing of the line of credit and evaluation of asset relationship limits within the line of credit structure, will be important considerations when evaluating future access to working capital. Successful companies will key in on price volume variance analysis to ensure inflation and commodity price shifts do not negatively impact the evaluation of historic and future performance.

When evaluating supply chain risks, questioning companies about alterative suppliers, off shore, on shore and nearer shore, is key. Availability of transportation resources as well as staffing resources impacts successful supply chain management. Supply chain issues directly impact working capital management. Questions related to working capital need to be asked, and should include:

  • Have inventory levels needed to increase or will they need to increase?

  • Have accounts payable terms changed?

  • Is accounts receivable able to provide working capital support?

Questions related to long term assets and capex needs should include:

  • Has the company needed to invest in additional warehouse space?

  • And warehouse equipment?

  • Does technology need to be expanded?


In summary, evaluation of a company’s performance needs to be developed to include these items.

  • Understand the future plans for the company – Q3 and Q4 of 2021 and 2022.

    • Locations

    • Staffing

  • Understand the plans to deal with inflation and commodity price changes.

    • Dealing with customers.

    • Dealing with vendors.

  • Understand supply chain impacts and plans to adapt.

Analysis needs to focus on working capital management, and availability of needed liquidity moving through 2021 and in to 2022. To properly evaluate a company’s performance, a comparison to 2019 performance levels will need to be completed, as will sensitivity analysis and a bridge to any changes in locations, staffing, etc. that will impact the cost structure.


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