First of all, don’t think profit…that’s the end outcome. Think about your reserves. In a tough economy running out of cash is what kills businesses…its the first point to everything.
Start by building a rolling 13 week (three months), cash flow forecast, and update this weekly. Track what’s actually coming in and going out, not what’s invoiced or accrued. It’s the current situation that we are looking at! Make sure that you update this weekly.
Next, plan for three different scenarios. Your current situation…then a downside of circa 20/30% revenue drop…finally, a more severe drop. Then decide in advance what you’d cut at each of those points. By making the plans with a calm head and as part of a plan, there are no panic decisions!
Then, have three tiers…
Essential: what keeps you operating and serving customers (staff, rent, core suppliers, tax).
Important but flexible: marketing, events, software subscriptions, which you can scale down.
Discretionary: cut or pause first.
One area that is important to maintain is revenue-generating activity. Cutting marketing and sales entirely often shrinks the recovery. Trim the low-return spend, keep what demonstrably brings in customers. This is not gambling but keeping the likely income streams protected.
Look to tighten working capital. Invoice promptly, chase late payers, and negotiate longer terms with suppliers where you can. Avoid tying up cash in excess stock.
Aim to build a reserve. Aim for three to six months of fixed costs if possible. Even a smaller buffer helps…add to it before spending on growth. This should be built into the business plan before the downturn starts…rather than a fixed annual budget, justify each cost afresh and review monthly or quarterly so you can adjust quickly.
Sometimes, its too easy to avoid the obvious…perhaps pride comes into play…but…talk to lenders, landlords and suppliers early. They’re far more flexible before you miss a payment than after! It also demonstrates that “you are on it!…this situation wont be unique to you!
Make sure that you know your break-even point. Calculate the revenue you need to cover fixed costs, and monitor how far above it you are. Finally keep some flexibility. Favour variable over fixed costs where possible (freelancers over hires, shorter contracts) until conditions stabilise. Conditions will change…be flexible yourself!
John Wooden
