The economic impact of the COVID-19 pandemic will be lethal to some businesses yet create growth opportunities for others. Some industries will see a massive decline in revenue and be forced to shut down, while others may have a minimal impact.
Wherever your business falls on this spectrum, every company will be affected in some way, so now is the time to create a new financial plan for the year.
While some factors are unknown, like the length of the pandemic, the fact remains that you know significantly more about what your business will face this year than you did in January. By re-working your 2020 revenue projections to account for this economic shift, you will have a far better grasp on what decisions you should be making now to survive or flourish this year.
Even though the external situation is unpredictable, by preparing carefully, your business can continue to operate in a somewhat predictable way. Either way, you’ll be able to consider various backup plans by being proactive about decisions you may need to make.
There are a number of factors you should consider when rethinking your 2020 balance sheet. First, consider how much cash you are spending. Updating your 13-week cash flow forecast weekly will ensure you don’t run out of capital. It is crucial to know how much you can spend in various areas and where you need to pull back.
Since cash is king right now, make sure you know where you have access to capital, either as a backup or as part of your new 2020 strategy. Consider a larger-than-usual line of credit, having investors lined up, and knowing which high-interest lenders have capital to offer.
One of the biggest factors impacting cash flow is your accounts receivable. Take a hard look at your accounts receivables to understand which of your customers may need to pay you late. While you shouldn’t let your invoicing get behind, determining how many of your customers may lack the cash to pay you in a timely manner, or who may have the potential of going out of business in the coming months, will help you better predict your cash flow.
As much as possible now, diversify your customer base to help you weather the storm. Create a pie chart of your clients. If you have any one customer that takes up a majority of the chart, prioritize diversification. If you have clients who specifically service the hospitality industry or other industries that are shutting down or on hold, find creative ways to support them without putting the risk on your business.
During a downturn, many businesses seek first to cut costs. While this sounds reasonable, and quick cost-cutting shows results in the short term, it is often detrimental in the long term.
Rashly laying off employees or removing the things they need to be productive can lower morale and result in poor customer service during a period in which keeping your best customers happy can be a lifeboat. Cutting marketing costs, for example, may not make sense long-term. You don’t want to lose complete visibility with your target market to save a few thousand dollars.
Smart cost-cutting can include negotiating with vendors and service providers to ensure you are getting a competitive price. If you do eventually decide to lay off staff, considering outsourcing as a way to get fractional professionals on an as-needed basis. Otherwise, you may end up burdening current employees with more work than they can handle, including tasks that are far more high level (or low level!) than they are suited for.
Knowing where your profits are coming from, at a customer level, is crucial. For service-based businesses, it is also essential to understand your utilization and margin by employee. By identifying which line items are more profitable than others you can focus on generating the greatest amount of revenue with the least amount of output. The Pareto Principle states that 80% of sales come from 20% of your customers, while the bottom 10-20% of customers are a drain on the company’s resources.
Even if you aren’t ready to immediately make changes to your business, having this data and understanding your financials will allow you to make decisions as needed and be adaptable as things continue to evolve. By paying attention to the items above, your business is much more likely to survive a downturn and even improve on 2020 goals.
Jennifer Barnes is CEO of Optima Office, a San Diego-based accounting, consulting and human resources firm.