As the cycle turns towards the positive for many businesses, it’s important to stop and take stock of all the areas of your business that were impacted by a downturn. Whether the downturn was specific to your industry, your region, your nation, or even the whole world, a good financial recovery means being mindful.
It’s easy to forget that cycles are normal. As the incredibly adaptable humans we are, we get comfortable with what’s happening right now really quickly. At the same time, most of us have a status quo bias, which has us believing and clinging to the idea that the current state of affairs has existed, and will continue to exist, indefinitely.
Intellectually, you know that cycles are just that: cyclical. You know that being in business means riding the entrepreneurial roller coaster. Many of us secretly hope, however, that we’ll manage to escape that, so we make decisions that work against our own best interest - especially when it comes to our finances.
If we assume that a downturn in the cycle is going to last indefinitely, we’ll probably look for ways to close up shop as soon as possible. This is one of the many reasons why new businesses consistently fail in the short term.
If we assume that an upturn in the cycle is going to last indefinitely, we’ll probably avoid taking precautions that will help us survive the next downturn.
Not you though - you’re smarter than that.
You’ve been reading our year-long series on recovery and you know that this is just the right time to create stronger foundations and better security for your business. You’ve already put in some work on your leadership, flexibility, self-awareness, communications, strategies, staffing plan, knowledge protection, business development and marketing.
Now, let’s get working on your money.
Review + Take Action
Most business owners really hate looking backwards. You are a futurist, forward-thinking, action-oriented entrepreneur! Looking backwards can feel pretty painful, especially if you don’t know what to do with it.
Here at Admin Slayer, we’ve tried to stop using the word “review” and instead replace it with specific action words like “strategize”, “finalize”, and “create”. Language matters, and knowing that you’re using that data you’re looking over to take action is just a lot more appealing for most people.
We also are big fans of monthly, quarterly, and annual check-ins. Each time frame has a specific set of questions, which might look something like this:
How do our top-line revenues, COGS, expenses, and net profits compare to the previous period and similar periods in previous years?
What are we looking forward to in the next period? Are there expenses we should be planning for? Staffing or manufacturing changes that will impact our ability to meet the demand?
What story are the financials telling us?
Hint: There is always a story, it’s really not just a bunch of numbers. A downturn is an amazing opportunity to shed light on all the cracks - there will be cracks - in your business. What can you learn? What can you change that will make another downturn easier? What weakness and strengths, opportunities and threats did this period of time demonstrate for you?
Was it the right idea to cut back and lay off staff? If you had to shut down for a period of time, what did you have - and not have - in place to help you survive that? Did you invest in your business, in technology, in marketing and business development? Did you sit back and wait for it to blow over?
Evaluate what you did, what you didn’t do. Look at what others did. What decisions did you make that changed things for the better or the worse? Knowing what you know now, what would you do differently… and how can you create the opportunity for that, now that you are in recovery?
REALLY Create a Cash Flow Plan (We didn’t say “budget”)
You know why a lot of businesses don’t have cash flow plans?
Because they’re hard. The reality is that you’re trying to predict the future and there’s a part of you that thinks that if you put that down on paper (virtual or otherwise), you’re somehow married to it. That if you don’t reach it, you have failed.
Separate yourself from that idea. You need metrics. You need to understand where you stand.
First, get to know what your fixed costs are. What does your business cost before you even get started for the day? This includes your minimum required compensation - for YOU.
Now that you know that, what minimum top-line revenue do you need to keep the proverbial lights on? This is your bare minimum survival number.
See, that wasn’t that hard (or shouldn’t be - if it is, it’s time to get a bookkeeper).
Next, get some ideas about what your other costs look like, or have looked like. This includes a more reasonable compensation for YOU. There are some things that are going to vary from month to month, quarter to quarter, and year to year. If you have some history, you might be able to put some averages on it. Know that these are averages.
Now that you know what this average looks like, what minimum top-line revenue do you need to stay afloat? This is your standard operating We’re-Doing-Okay-But-It’s Not-Amazing number.
Finally, think about what you really want for profit, if things were singing. What would you have to invest in your business to bring in the top-line revenue, that covers the expenses, that gives you that profit that you want.
This is your GOAL.
These three sets of numbers are what you’re comparing your business against when you’re doing your review-and-take-action times (which are scheduled in your calendar monthly, quarterly, and annually - right?). These basic numbers tell you where you are at all times, versus where you want to be.
Plan for Fixed Expenses
Use that bare minimum number to know what you need in your operations accounts on a regular basis in order to be okay. Aim to have between 3 and 6 months available in your operations accounts at all times.
Some businesses separate out budgets for various areas (payroll, marketing, etc.) into separate accounts. If that makes it easier for you, do that. If that’s too much, just keep an eye on your 3 to 6 month number and keep it rolling.
If you have once-a-year expenses such as accounting and legal fees, insurance costs, and property taxes, set up accounts for those and transfer 1/12 of that amount monthly. Then you know the money will be there exactly when you need it.
Plan for Taxes
As a business owner, you’ve unwittingly become a tax collector, working on behalf of your local governments. If there are sales taxes, value-added taxes, goods and services taxes, you are collecting these on a regular basis. A lot of businesses get into trouble when they don’t plan for these.
One of your actions for your monthly review is to determine what your net taxes of these sorts actually are, every single month. Get your bookkeeper to calculate that number - you’ve got other things to do. If you have to submit these monthly, just submit them monthly. If you have to submit these on a different basis, then set up a savings account, and transfer these each month. This way, they’re separate from your actual operating accounts, and you know how much money you have to keep your lights on each month.
Get your bookkeeper to calculate your estimated income tax as well, and transfer the right amount monthly.
All of these small actions smooth your cash flow over the year, and create stability, regardless of how high or low the roll is in your particular coaster. (It works for personal cash flow as well)
Now You’re Ready for the Fun Stuff...
Once you’ve built your solid foundation of cash flow management for your business, you’re ready for the cool stuff. The money-growth stuff.
Take a look at that GOAL number.
You know that it’s going to take money to make money. Right now, when you’re in recovery, and the cycle is turning in your favour, you’re in a good position to make some investments in your business. Maybe you uncovered cracks in your cybersecurity, or your industry is getting more and more out of AI. Maybe it’s time to take your marketing and business development to the next level, or invest in your team.
Now that you know how to create stability, you know exactly how you can invest in your business - and you don’t have to do it alone. Get the expert help you need to not only survive, but thrive, as the cycle continues.