Having worked with a lot of Christian small business owners over the years let me encourage you… I have yet to meet a more dedicated, hard-working committed group anywhere. At the same time, let me challenge you to examine how we do things. Many of the challenges we face as small business owners are because of our blind spots.
In a recession, a blind spot can take your business out. The strategies that I am endorsing in this blog make good business sense when times are good, and they are especially important when times are challenging. Something that would just be a speed bump during good economic times can take your business out during a recession. For example, a perception like, “I am not good with numbers” or “I don’t know financials” can be a huge detriment to your business. The result of this perception is that you default to something you believe you can control, a habit or the pattern that you have grown used to, and something you are comfortable with.
When we encounter difficulties or are faced with challenging economic times (think recession) we rely on our faithful solutions and work harder and or longer. When the right solution is to work smarter with more focus and clarity about what is most important.
According to the U.S. Bureau of Labor Statistics (BLS), approximately 20% of new businesses fail during the first two years of being open, 45% during the first five years, and 65% during the first 10 years. Only 25% of new businesses make it to 15 years or more. These statistics haven't changed much over time, and have been fairly consistent since the 1990s. If we had the right solution, “just work harder and longer” the small business success rate would be much higher.
Running out of money is a small business’s BIGGEST risk.
So, financials are one of the most important things a business owner needs to pay attention to.
Managing your financials effectively comes down to two big principles:
- Know your numbers: have a budget, know your breakeven, and have a profit target.
- Have a war chest: build up a surplus of cash and have it ready either for an emergency or to invest in a way that will propel the business forward.
KNOW YOUR NUMBERS
Owners often know what funds are needed day to day but are unclear with other critical questions such as:
- How much revenue is being generated, each week, vs how much is needed?
- Who are my most profitable customers?
- What is my breakeven point: what is the minimum amount of sales I need to make to keep the core of the business whole and pay all of my bills?
- How much money do people owe me…even for stuff not invoiced yet?
- Could I withstand a 6-month slowdown in sales?
- What is my contribution margin, my profit margin?
- Sales pipeline: how far out am I able to predict with accuracy what my sales will be?
- How do we compare with the best performers in my industry for key numbers?
Now for some of you reading through this list, it’s easy and you are thinking got it, got it…tell me something I don’t know.
Others look at the list and are overwhelmed.
Let me speak a word of hope for those that are overwhelmed…it’s not that complicated.
Finance can be fun!
Let's make it simple, your plan for improving your finances needs to include:
- Streamlining and improving existing financial reporting
- Moving your financial reporting from a rearview mirror, something you get a report on annually or even 1/4ly, and instead reporting that you review weekly and monthly.
- Improving your financial acumen, what are the 2 or 3 critical numbers you need to pay attention to every week and month to stay on track?
- Create benchmarks and targets so that you can have a financial report that is highlighted in Red (danger), Yellow (watch out), and green (good to go). At a glance, you can immediately know what to pay attention to.
Or in other cases, we may even know the numbers but not know how to translate the numbers into something meaningful in the business.
If that is you, reach out for help. We have worked with plenty of businesses to help them clarify their financials (click here for information on our financial support program). Once you know and understand the key metrics, you can make dramatic progress in improving your business.
Building a War Chest:
The second big focus in preparing for a recession is to have a war chest. A recession will challenge your business in many ways, markets may change, revenue may be less consistent, your customers may slow payment down, and some may even not pay you. Your ability to weather this kind of challenge is dramatically impacted by your cash reserves.
The first question to ask is how much time do we have? If it is 6 months, a lot of issues can be fixed and resolved in that time frame. If on the other hand, it is only a matter of weeks and or days your options are much more limited.
The biggest thing that determines how much time you have is your cash reserves. The more cash reserved the more flexibility and time you have to address and respond to market conditions.
In addition, in a recession, other opportunities may present themselves:
- Competitors going out of business - allowing better-prepared businesses to pick up staff, equipment, and/or market share.
- Competitors downsize and or pull back on marketing again- presenting an opportunity for those better prepared to invest and grow.
HOW DO I BUILD UP MY WAR CHEST?
- Delay purchases
- Pay down debt
- Tighten up your business processes and drive up the marginal contribution
- Stay on top of your AR’S - have a target, and review weekly
- Tighten up your billing - ensure you are billing as quickly as possible after the work has been completed.
- Review line of credit arrangements and update
- Improve the predictability of your business (makes it easier to get cash if required)
- Consider selling assets that are not producing revenue
Let me leave you with a thought…
Knowing your numbers helps you understand reality and adapt and change quickly. Having a war chest lets you sleep at night and provides flexibility so that you are not taken out before you have time to adjust to changing market conditions.
Do you need help understanding your financials? We can help, click here to check out our Back Office Brilliance program.
Do you have questions about how to thrive through a recession? Attend our FREE webinar on January 11th where we are providing 4 keys to recession-proof your business. You don’t want to miss it!
