As I work through hundreds of business plans each year for new and startup businesses, I am constantly reminded of one certain fact: in business, you don’t know for sure what is going to happen. It’s one of the most vexing challenges for business owners, already juggling many responsibilities, to make decisions for an expected future that may – or may not - happen.
Those already in business know about the never-ending changes that push the business up and down, coming in bursts of sunshine then storms. Without doubt the good conditions are easier to manage, but the storms can come quickly, with economic volatility, changes to regulation, market fluctuations and even election campaigns for some businesses (like mine) biting.
The constant series of decisions that need to be made are based on assumptions of what is going to happen, based on best estimates and understanding of how the business has been operating and the business environment. Decisions can be big ones, such as hiring staff, taking out leases, buying equipment and making investments, or small ones such as what marketing to use, how much to pay yourself or how much tax to keep aside. Getting these wrong can come back to bite you, if you’re not careful.
So many small businesses operate day-to-day, with no planning for the downs, but it’s worth giving this some consideration ahead of time, so you don’t have your head in the sand when something challenging comes along. Some forward planning and true understanding of how your business operates will help to steer your business through the rough times.
Know the numbers
From what I see, there is not a deep understanding of financial fundamentals in small business. Beyond the BAS statements, there is great power in the knowledge of margins, profits and break-evens. The levers available in the business to manage the break-even are very powerful. For example, in a downturn, managing non-billable time, cost of client acquisition, conversions in the sales process and average sale per client can save losses. In your business, it’s essential to measure everything that moves. Below the headline numbers are a range of deeper metrics that all feed in, all of which can be managed.
Watch the signs
All storms have warning signs, even if they approach quickly. Part of your role as an owner is to know what’s coming well in advance. Keep track of the monthly, weekly and annual trends - how does it compare to last year, month or week? When things do change, dig in to know why and take action. Watch the economy closely.
Keep spare cash
Ultimately cash will be your key to survival if things get really rough, so work towards having access to it if needed. Intermittent losses are not uncommon, but if they are sustained then you will be in trouble. If not cash, then access to credit can be a lifesaver.
In Australia, we have been in economic oasis for a record-breaking 28 years, which at some point will have to end. It goes without saying that effective business planning will encompass future threats and that good planning should have you more prepared to weather any storms.