This is not a fun article. I’m probably going to get some crap for writing this, but it will be from people that are afraid or haven’t come to terms with the situation we’re heading towards. These are uncertain times and information is changing daily. Certain businesses will have difficulty surviving these events. Fortunately or unfortunately, I have seen these telltale signs many times in my 24 year career working with small and medium sized businesses. It’s important to understand that the external aid that will be offered will be slow and if you don’t act now, you may go out of business.
For businesses, the aid that will be offered will most likely not be handouts. There are slim chances that anyone is going to just give you money and if they do, it certainly won’t be enough. It will probably come in the form of loans or tax breaks, so you will either be more in debt or won’t get relief until next year. So, what do we do about today? What if you need help now?
An Ernest Hemingway mis-quote from, The Sun Also Rises, rings true here. Responding to the question, “How did you go bankrupt?” the character says, “It occurs first very slowly, then all at once.” This is what’s happening now. Cash is king. I hate that expression, but it’s a simple phrase to keep in mind during this time. What you have now, is what you’ve got.
Here are some points to consider when preparing your business for a recession.
Is your business worth saving?
Maybe you’ve had your business for a while. It could be that you haven’t had your business that long at all. Do you still like it or is it a burden? After a long discussion with yourself, do you feel that it’s actually that bad? You have to love what you do and you have to fully believe in your business. If there are days that you dream of working for someone else, without the headache, then maybe it’s time for a change. If you can’t stand the idea of having a boss and wish to do your own thing, then stick with it or start another business. There are lots of options to consider here. Whether you decide to stay with your business or move on, do what’s right for you.
How much money do you need?
After all of your expenses are added up, plus a bit more, do you have enough to make it through the month? What about the next three months? Or the next six months? If you have enough money to get you by over the next six months, congratulations, you are in the minority. Many businesses struggle month to month and a long period of disruption could be devastating. This is a very important point to consider. The sooner you understand how much money you have and what’s needed to keep the business going, the faster you can implement a plan.
How much money do you have?
As I said before, what you have now, is what you’ve got. Do you have a lot of receivables out there? If money is starting to get tight for you, most likely it’s getting tight for them. You are going to want to get that money as soon as you can. If you start to get resistance, you may want to start negotiating lower or partial payments, just to get some money, any money, in the door. If you owe a lot of money and you haven’t mailed it out yet, stop. Hold on to your cash until you have a full understanding of the situation.
What are your budget thresholds?
When a business starts to fail, it’s very emotional and that can affect your decision making. Down below I’ll be discussing scenarios that you can establish for your business to enact certain measures when cash flow drops below a certain threshold. For example, if you need $X to pay your bills and run your business normally and you don’t have the budget to sustain that, something has to change. Cuts need to be made in services, personel and possibly assets.
What’s the minimum you need to remain operational?
This is the bottom. What is the absolute minimum you need to still stay in business, but on life support, before you close the doors? Can you do it by yourself, do you need others? Are there services you need to pay for? Do you have to pay rent for an office or building or can you move the business home? Besides the financial budget, you need to know the physical component of what you need to keep your business going.
Actions to save your business
Once you address all of the points above and have some numbers to go by, you can start developing a plan. A three scenario plan is a great place to start. Your scenario’s should start with going from cautious to catastrophic. Here are some examples.
Scenario 1: Quick Action
- Create a target budget that will need to be met to keep this scenario sustainable. If this budget is not met, then you will need to enact Scenario 2.
- Move all cash out of any account that’s automatically drawn from to prevent any accidental automatic withdrawals.
- Contact all of your subscription accounts, monthly bill payments and stop all automatic payments from your account.
- Contact anyone you pay on a monthly basis or owe money to and politely ask if you can delay payment. Remember, they will get paid, you need to delay payment until you understand how much money you have.
- Lower prices, create bundles and have a really big sale to generate revenue.
- Immediately reduce marketing spend to focus on high margin products or if in services, discontinue it altogether if other avenues exist, such as email or social media.
- Research and apply for any business aid that is within reason. Be careful here, taking any additional loans that you cannot possibly pay off will not work. Even consolidation loans can be risky. Additionally, look into any unemployment benefits for you and your employees that you can implement immediately. This may help stretch available cash a little longer.
- If you are in services, finish any outstanding projects to get final payment.
- Only work on projects that generate high revenue.
Scenario 2: Survival
- Create a target budget that will need to be met to keep this scenario sustainable. If this budget is not met, then you will need to enact Scenario 3.
- Do everything in Scenario 1.
- Make a list of people to layoff in your company. The financial savings from this layoff should put the company in a significantly better standing. This process is difficult and should not be taken lightly. If the cuts aren’t deep enough, you will just have to do another layoff. If the cuts are too deep, it could force you into Scenario 3.
- All remaining staff reduce salary by 25-50%. This is to help reduce the number of staff that you would need layoff, with the hopes that a reduction in salary would only be temporary until the financial situation improves.
- It’s worth mentioning that layoffs should not be taken lightly. There are several laws around laying off employees and your obligations to pay current wages and remaining PTO. Do your research and make sure you are complying with all local and federal requirements.
Scenario 3: Catastrophic
- There is no budget here, because this is the bottom. At this point the business may still function, but it may or may not be making enough revenue to sustain itself. You may be just trying to keep the business going or liquidating the assets and preparing the business for closure.
- Do everything in Scenario 1 and 2.
- Identify the absolute minimum staff needed to operate.
- Create a new business model, fewer products, higher margin.
- Completely re-evaluate overhead to be smaller, cheaper and more efficient.
A recession is a very difficult and stressful time. It takes longer to recover than you think. When you start to see the signs of a recession coming and your business is suffering, be decisive with your decisions to protect the business. The longer you wait, the more money you will lose and the harder it will be to stop the spiraling downfall. When you’ve stopped the bleeding and your business starts to recover, don’t make the mistake of being too risky too early and thinking the worst is over. It’s better to be conservative and make slow and strategic decisions from here on out.
It’s normal to feel obligated to your staff and employees. It’s normal to ask them to hold on until things get better. It’s also your responsibility to be honest with yourself and your employees. Bankrupting you and your employees just for the sake of protecting the ego of the owner or the lifestyle of your team is negligence. It’s impossible to know the monthly financial situation the team is already in, before a crisis like this occurs. Putting your employees into further unnecessary hardship is irresponsible. Employees may not see that layoffs are for their own protection, but the sooner you make decisions to protect the business, the sooner employees can do what they need to do to protect their families.
I hope this information helps you prepare your business. There is a lot of uncertainty right now and it would be unfortunate for a business that wants to stay in business, to not get the help they need. Please reach out to me and I’m more than happy to help and offer any advice I can.