The coronavirus has been labelled the biggest global crisis for three generations. The economy came down 50 floors in the ‘elevator’ and it will be much slower and harder going back up via the staircase.
The pandemic didn’t discriminate with both big and small businesses going into hibernation and with so many business owners in survival mode, cash flow is understandably the number one priority. It is the oxygen that keeps businesses alive and for those forced into hibernation and unable to trade, the Government Stimulus Packages have provided a temporary lifeline. Some businesses have been able to pivot and find new ways to generate revenue, however, the shutdown has created a cash flow crisis for most business owners.
American business magnate, investor, and philanthropist, Warren Buffet said, “Only when the tide goes out do you discover who’s been swimming naked.” In boom times, flawed business models and poor business practices go unnoticed. When the economy is booming, we tend not to worry about our level of debt or expenditure on non-essential items. We don’t think we need a safety net because it’s all blue skies ahead.
Enter COVID-19, the pandemic that changed the way we live, work and play. Businesses, big and small, have been impacted and our economy may never be the same. The tide has gone out which has exposed a lot of businesses and sadly, a lot of them won’t survive this crisis. Some analysts predict an avalanche of business collapses and unemployment of more than 10%.
Economic downturns always produce change and some of it will be for the better. We might find workplaces more flexible with staff working remotely from home which will reduce travel time and costs. This might prompt business owners to reconsider the amount of office space they need which could significantly reduce their rent and overheads. Businesses will shed some fat and unnecessary costs. IT systems and staff resources will be under the microscope.
While revenues have been diminished or extinguished, some expenses won’t stop. Proactive business owners have been able to negotiate a rent reduction or rent-free period; however, you may have to fund IT equipment for your staff who are now working remotely. Expenses like insurance and rates don’t stop and it is imperative that you have a clear understanding of your future cash flow. To help your business survive and prepare for the period of regrowth we have put together this list of items to consider:
1. Build a Cash Flow Forecast
The main reason business owners usually prepare a cash flow forecast is to raise finance, however, right now it needs to identify the timing of potential cash shortages.
Typically, your forecast should project cash flow for the next 12 months but right now, the next 3 to 6 months is essential. Keep updating it at least every month as you get more information and certainty around revenue and costs.
Whenever you prepare a cash flow budget you have to make a number of assumptions based on research, available data plus known facts such as fixed costs like your rent and loan repayments.
The economic uncertainty makes it particularly hard to project your revenue, but you need to do use your best estimates. For some businesses, with interrupted revenue, calculating your Government entitlements is a priority. Don’t forget to include your tax payments (or refunds) and your cash flow forecast should provide you with your likely cash position at the end of each month.
The idea is to identify the likely cash shortages and solve them before they become critical.
2. Know Your Numbers
Up to date, accurate financial records allow us to work together to make informed business decisions. Start by preparing interim financial statements so you know where you stand for this financial year. What is your likely tax position for the year ended June 30, 2020? Can you vary your PAYG instalments? What entitlements do you have to Government incentives like the cash boost, JobKeeper and State Government grants?
Your numbers tell you where you have been so you can make decisions to improve your results going forward. Compare your sales in 2020 against the same week and month in 2019. Breakdown your sales by product so you know what your best-selling items are. Know the profit margin on each product so you can identify your most profitable items.
It’s also important that you have a snapshot of key financial numbers including your accounts receivable (debtors), accounts payable (creditors) and current bank balances.
An obvious strategy is to reduce your overheads, which could mean renegotiating your commercial rent. Landlords will generally want to maintain relationships with long-term tenants and the Government introduced a mandatory code of conduct for commercial tenants affected by the coronavirus. Revisit payment terms with your suppliers and you might want to check in with them regarding their pricing policies post-pandemic. Of course, make sure they are still in business and can continue to supply you. You might find it’s a good time to explore new suppliers who might be able to provide the same product or production inputs at cheaper prices. Now is the time to explore any loan deferrals on offer from the banks.
4. Remove Non-Essential Expenses
Go through your profit and loss statement, line by line to identify any expenses that could be shaved or eliminated. Do you need the same amount of stock or warehousing? Do you need to maintain the same hours or number of staff? Could you postpone some expenditure? With cash flow uncertainty, it’s obviously appropriate to defer any capital expenditure despite the instant asset write off concession.
5. Prepare for the Post-Pandemic Period
COVID-19 arrived with little or no warning but it’s time to plan for the post-pandemic period. Do a SWOT analysis to analyse your business’ strengths, weaknesses, opportunities, and threats. Think about what you could be doing better and what resources you need going forward. There might be opportunities in the ‘new world’ because some of your competitors probably won’t survive this upheaval. You might be sitting on new products or processes and it could be time to hatch that plan you have been sitting on. Look at how quickly businesses embraced working remotely after hesitating for years.
Maybe it’s time to pivot, expand or reduce your product offering. Have you been too dependent on one major customer? Should you expand your home delivery services? Is it time to review your suppliers?
Keep asking questions because how you’ve managed the crisis might provide clues on how you should operate in the future.
Staff – despite the JobKeeper scheme there will be lots of redundancies and possibly double digit unemployment. When the lockdowns finish, it won’t be business as usual and it will take time to crank up the economy. It’s a big engine and it will be a slow burn to restore economic confidence. As a result, you might get access to people with a wealth of knowledge and experience in your industry. Some of them may have worked for your competitors which could give you a competitive advantage. Remember, your current staff, have also been affected and they are a great resource to help you identify potential improvements in the business.
Technology – has played a key role in businesses adapting to the changing landscape. With so many people working from home it has forced the use of technology to conduct meetings and access files remotely. While necessity has forced the change, there could be other software and technology available that could help you create even more efficiencies. Technology has impacted the way professional service firms like accountants, solicitors, architects, engineers, and doctors deliver their services. Who would have thought we would see GPs sitting at home providing virtual patient consultations?
6. Marketing Just Became Even More Important
In recessionary times your marketing could be the difference between boom, doom and gloom. It is a stressful time and it’s easy to get distracted by financial matters not to mention staffing issues. You need to stay top of mind with your existing customers so it’s essential that you reach out to them with a newsletter or special offer. Remember, most people tend to reduce their spending at this time so targeting your existing customers makes sense. They know and trust you. The obvious question is, is your client database up to date so you can send emails? If not, fix it!
Self isolation has people glued to their phones and the internet. It has changed when, where and how your customers and prospects are engaging with your content. Online activity and sales have gone through the roof in this period and we have seen plenty of businesses successfully pivot and shift their entire focus online. The pandemic reinforces the importance of having an online infrastructure for your business.
If your website is outdated and really reflects your business 3 or 5 years ago, it’s an anchor weighing down your business. It could be time for a makeover or possibly a new website. Is your e-commerce section on your website up to scratch? Is it time to review your product descriptions, add calls to action, produce some videos and write some blog posts? Is your social media strategy in need of an overhaul? Look at your competitor’s websites and cherry pick the good ideas (but never copy their content). You’ll probably find plenty of them are simply electronic brochures that list the who, what and where of the business. Think about what consumers will want in the post pandemic period and tailor your content accordingly. Your content should highlight your expertise and you want it to appeal to your ideal type of customer or client.
Make sure you have a call to action on every single page and include social proof of how you solved other customer’s problems. Think about producing a lead magnet with valuable information you can offer prospects in exchange for their email address so you build a database of contacts you can market to in the future. Email is the beating heart of most marketing campaigns and make sure you are communicating with your customers to let them know you are open for business (even if your shopfront is closed).
In summary, it’s not easy to focus beyond the current crisis. This is a life changing event and we have never seen anything of this magnitude in our lifetimes. No person or business is off limits. It’s certainly challenging on a number of fronts, but the successful businesses will make it through this crisis because they are looking to the future.
Basic survival instincts will make you focus on building cash reserves, however, revival is all about preparing for the new ‘normal’.