Businesses are being tested in ways they have never been tested before.
The sad news is that whilst the COVID-19 situation is unprecedented, it is also highly likely to happen again at some time in the future – hopefully the distant future. Many businesses are currently in survival mode and looking at how to keep the doors open when the current crisis eases. Now is also an opportunity to learn lessons about how you make your business more resilient in the future.
Where to start?
I believe that these 3 elements, when really thought about and planned, don’t just make your business more resilient, they also make it more valuable in the long term.
- Build a War Chest (this is critical)
- Plan for the future in different time frames – 90 days, 12 months and 3-10 years
- Fix your business model
Build a War Chest
If anyone thing was exposed during the COVID-19 pandemic, it was the number of businesses that had almost no cash flow resilience. Many businesses struggle from one payday to another and constantly fight to keep their heads above water. They rely on continuity of sales to keep them “just above broke”. Recent event have sent these businesses into a spin.
Even seemingly well-funded organisations have been adversely affected because they did not have a clear view of their cash demands going forward. Too many businesses have been stripping all the cash in the form of dividend payments. Having a war chest means not having to worry about immediate survival. It also provides funds for investment in the future growth of the business.
What is a war chest?
In the days of yore, a war chest was the funds required to keep an army fighting, paid and fed during a war, where the “soldiers” would otherwise have been working on a farm, in smithies or in stables. In the present day, it’s the amount of money a business needs to survive 3 – 6 months when a major disruption happens. Usually this would be loss of a major client, or staff, or something really dramatic in the business – loss of premises for example. The current COVID-19 pandemic is exactly why businesses need a war chest.
How do you build a war chest?
Well run businesses understand their cash flows and forecast their cash demands and surpluses going forward. Having a high cash balance and making the decision to buy a new asset based only on the cash in the bank today is why some many businesses run out of cash and then fail. Cash is the life blood of an organisation, yet it is so poorly understood in many businesses.
Some key actions to start, if you are not already doing them are:
- Forecast cash flow for the next 3-12 months and make sure to include:
- All direct debit payments
- Salaries and PAYE
- Taxes as they become due
- Any regular bills such as utilities, subscriptions, rent etc
- Any commitments on cash
(Remember cash flow forecasts are CASH movements, not transactions)
- From your actual cash flow, build in any expected activities such as future revenue and related costs (remember it’s the timing of the cash in and out, not the invoices)
- Plan asset purchases on the basis of when the cash will be required
- Plan your dividend payments
This builds up a picture of your business from a cash perspective and shows you when you have peaks and troughs in your cash flow. It will allow you to plan for future cash surpluses and shortages – so you don’t spend money when you are flush only to struggle later when cash is tighter.
And building a war chest? If you have a clear view of the cash in your business now and in the future, you’ll have a better idea of how much you need when disaster strikes. Some businesses can cope with a 3-month buffer, some need much longer. There is no 1-size fit all approach. Building up to it by planning your cash is one way of being in a better position for the next crisis, whenever it happens.
Plan for the future in different time frames – 90 days, 12 months and 3-10 years
Failing to plan is planning to fail – and yet so many business owners do not plan at all. Over 40% of all business owners do not have a plan for their exit for example and yet 100% of business owners leave their business – one way or another, it’s guaranteed.
The challenge with planning is most people do not find it easy. If you plan for years in advance, then the goals seem too big and too far away. The bridge between now and then spans such a wide gap, it feels impossible. The secret is to break the planning down into bite size chunks. Plan for 10 years in very high-level details – how big, how many employees, where will you be (personally) and what does your business do to serve your personal life goals.
Now break it down into 10 x 1-year chunks and take the first 10% step towards those big goals. Where would you be 10% along the journey and what needs to happen to get there? Now break that 12 months into 4 x 13-week chunks. What needs to happen in the next 13 weeks that will take you and your business closer to your goals. Write it down and share it with your team. Et voila – you have a plan!
That makes it sound simple and the truth is, planning need not be complex. It’s made complicated by your approach. Strategic planning is simply looking at a major goal and breaking down the activities that it will take to achieve the outcomes required. Of course, all the planning in the world is completely useless if it doesn’t lead to action and implementation. Many people have a plan in their heads. Getting it out on paper and communicating it to your team is where the real magic happens.
Fix your business model
Do you really know your numbers? I don’t mean have an accountant level of knowledge on book keeping and the finer points of statutory accounts. I mean are you financially literate enough to understand your business from the perspective of cash, profit and assets?
Many businesses that find themselves in crisis have been operating their companies with a very poor business model and have been slowly drifting into bankruptcy (or just above broke) without knowing it. If you haven’t got adequate margins in your business you can’t build a war chest, you can’t grow your business and you end up stuck in a no-man’s-land. You stumble from one cash crisis to another and that’s stressful.
Fixing your business model starts with knowing your numbers. Can you answer these questions?
- What is your gross margin (GM) on each product or service?
- What are your overheads?
- What is your breakeven? i.e. how many sales do you need to cover your overheads?
Just knowing these 3 numbers will help you make decisions for the future. It will allow you to think about your business in a different and informed way rather than using gut feel or guess work. It’s really important if you are thinking of growing your business.
On the other hand, if growth isn’t your ambition, if you are getting tired of your business or just tired of certain customers, ask yourself “what would happen if I stopped doing the activities that I don’t enjoy? This is a really important questions when you know the GM of those services. I often find that business owners enjoy delivering some services and not others – yet the reason they do the less enjoyable work is because it’s profitable.
If you are doing things that generate revenue and you don’t enjoy them – ask yourself “How profitable are these activities?” If they are highly profitable think about getting someone else in your business to deliver them or manage them. You can then spend your time and energy on other more satisfying activities. Of course, anything that’s not profitable is just a hobby so you need to be honest with yourself about whether you have a business or a pastime.
Your accountant or finance team should be able to answer the profitability questions and present the information to you in a way that allows you to make informed decisions. If you can’t understand the information, it is not enabling you to lead your organisation – keep asking till you either get the reports you can understand or change your finance support. It is not acceptable for you to not understand your accountant. It’s their job to make sure you understand. You do have to meet them half way by educating yourself and asking questions. Don’t give up until you know your numbers. Your business is weaker if you don’t.
Throughout the centuries there have been business cycles – times when it’s harder and other times when its booming. The businesses that survive are the ones with greater resilience. They have a war chest, their business model works, and the business owner knows the numbers. Now is an opportunity to appraise your business resilience and get it fit for the future. NOW is a great time to start – don’t put off till tomorrow what you can change today. Start on the path to making your business more valuable for the long term.