For the most part, business plans tell a story of growth and development for the business. This is not just because the owner is trying to convince a bank or investor to hand over some cash, but in goal setting for the business the ambitions for the future are mostly for growth and how to make it happen. However, business plans are equally valuable in preparing for times that might be less rosy; in fact, business planning is probably more valuable in these situations. As dark clouds gather on the economic horizon, the next plan that any business should be developing should consider strategies for business not growing, and even for possible downturns. It’s been a long time in Australia since that happened, but better to be prepared that caught out. Small businesses are particularly exposed when things go south, mostly with no preparation, so are left scrambling to cope.
Planning for downturns takes a slightly different approach. The objective is still preparing for possible future scenarios, but taking more time to explore risks and lower revenues. The exercise still involves taking the business apart and looking at the fundamentals, so you can work out potential strategies to deal with them promptly.
The power of metrics
Understanding and measuring business metrics is crucial and has a long-term benefit for business management (regardless of what happens). For your planning, things to consider are:
- What are break even revenues, contracts and clients?
- If your revenue drops below the break even, what costs will you cut? How will you manage?
- How will you manage loss or reduction in a large contract? What steps will you take?
Cash and credit
Your cash reserves may not just be something nice in your bank account if things go bad, they might just keep you going in future. It’s definitely better to be planning for additional capital when you aren’t in crisis. You need to know how long it will last under a variety of scenarios: Will your current credit be affected in a downturn (as it happened in 2008)? Work with your financial team to assess the availability of credit but also what levels of debt you want to carry and service, should business slow down.
One of the worst scenarios to have to manage is cutting staff. It’s a highly emotive decision to have to make, but can be necessary. This can be a legal minefield, especially for small business, whose systems and processes can be poorly developed. If there is a potential need to take this action, get legal advice early so you can be prepared, as well as advice from HR experts, who can help manage the process to minimise pain for everyone.
Risk assessments are very rarely done by small businesses (almost never), but a roundtable of the owners and managers can be very useful to mapping out all scenarios, impacts, and clear actions of how to minimise the risk and impact. It could also be that the activity of planning uncovers some future challenges for your business that needs addressing regardless of the economy. In doing so, you can re-set the direction and uncover new markets, products and opportunities that diversify and lower your risk.
Being surprised and unprepared for a downturn is not a great place to be, as your financial losses are likely to be the highest and the biggest impact on everyone. Playing Devil’s advocate for your business can be extremely useful for your business future even if the economy goes well. Forewarned is forearmed.