Think back to New Year’s Day, none of us imagined society would essentially grind to a halt. Right now our natural reaction to suddenly being seeped in uncertainty is to freeze up, hide from the world, and watch Tiger King on Netflix while trying to ignore that tightening in your chest.
You can’t hide forever though, bills come due, employees need to be paid, and your cash reserves run out. You can run out and take advantage of every loan, grant, mortgage relief you can find. Without a solid plan, you may still come up short and as we’ve all seen this year, predicting the future just isn’t possible.
Fortunately there are few things that you can do now to stave off economic disaster. Start by gathering your financial statements for the 12 months before things went off the rails. Now lock yourself in your study, take a deep breath, and dig in.
1: Analyze your Expenditures
You want as much detail as you can without getting overwhelmed. Start by crossing off any one time purchases. Did you buy a printer last year? You’re not likely to do that again so cross that off.
Now look for the low hanging fruit. What can you eliminate? That MLB channel isn’t doing you any good if there isn’t a baseball season. Are there other streaming services that you don’t use anymore. It may seem small but this is a process and you might be surprised how quickly these costs add up.
Next evaluate the expenditures you have left. What do you really need to keep your core business going? Can you find cheaper alternatives? Can you renegotiate terms?
I’m afraid we’re going to have to talk about payroll. For many businesses, this is the largest expense they have so it would be remiss not to look into it. As unpleasant as it is, you may have to lay some employees off. I was laid off after 9/11 and know first hand how it feels so I don’t suggest this lightly. Right now you’re in survival mode so you may not have a choice and unemployment benefits are more generous than normal so do what you can to help with their transition and move on.
As a cautionary note, resist the urge to cut hours or salaries. Your employees may understand why it’s necessary, but asking them to do the same job or even take on more responsibility for less money is going to lead even the most loyal employee to update their resume. Then when they leave, it will be their timing not yours so think very carefully before going that direction.
2. Evaluate Cost of Sales
You may not find a great deal of savings here. If you produce a product to sell, materials cost what they cost but if you’re facing sales declines do you need to order as many supplies? Can you find less expensive alternatives without sacrificing quality? Talk to your vendors. This is no time to hide. You may be able to get better terms.
3. Rethink Your Product Line
This is a good time to really think through your sales. Are there product lines that are less profitable or perhaps not profitable at all? If so then eliminate them or find ways to make them profitable.
You may also want to examine your profit by customer. The 80/20 rule states that 80% of your profits are coming from 20% of your sales. Take emotion out of the equation and cut less profitable customers out to focus on the top 20%.
4. Balance Sheet Analysis
See if there is anything that can be converted to cash? See who owes you money and call them to see what they may be facing. If they can’t pay you everything at once, can they manage a payment plan? Similarly, if you have liabilities you simply cannot pay, call your lenders to see if you can make partial payments.
How about those fixed assets? Did you buy a new widget that was going to be fantastic last year? You may need to sell it and go with a cheaper option.
5. Wrapping It Up With Your Cash Flow Statement
Now that you’ve combed through your other statements, you should have a clear idea of how much cash you need to cover your costs. Looking at your Cash Flow Statement will show you how much cash you have coming in and going out every month. If you still come up short, sharpen that pencil and go through the process again.
Clearly this is not the fun side of running a business, but it is necessary. It won’t help you, your customers, or your vendors for you to go under. Taking steps now to create a leaner more efficient organization could be the deciding factor for your business continuity.
If you have any questions or need help with your analysis, Blackberry Accounting is here to help. Call today for a free consultation. We love to hear your business plans and will do what we can to help you navigate these difficult times.