COVID … The “C” word no one wants to hear because it has stolen the livelihood from so many businesses since it came into existence in Australia.
With 60% of businesses reported to be affected greatly by COVID in March alone, active cases ramping up again, and states and suburbs going into lockdown and self-isolation again, there’s a high probability you have been affected in some way too.
Adding to the pain people are suffering right now is the fact that JobKeeper payments (as we know them) will end for some businesses from the end of September.
However, while these payments will remain available for eligible employers until March 28, 2021, the light at the end of the tunnel still feels so far away and these combined factors are adding to the stress businesses are facing.
So what do you do now?
How can you shield your business from another hit?
It comes down to putting a plan in place – just like many businesses have with their COVID-safe strategies.
Putting a plan in place to protect your business
The step is looking at your current business plan and upgrading it. If you don’t have a business plan, it’s time to get one in place.
Take a look at your expenses and cashflow. Cashflow is the single most important factor in your business.
Like blood to the heart, without cash, a business won’t succeed. To safeguard your cash and future cashflow, here are four actions you can take right now.
- Prepare a cashflow forecast and make this part of your annual business planning.
The first time you prepare this type of forecast it can be confronting as you really look at your situation and challenges.
Having your forecast in place can set you up against any issues you might face in the short and long term. You’ll be able to predict those months when there is more cash going out than coming in. You’ll also know in advance about any seasonal fluctuations in your business.
- Incorporate your forecast into your accounting or reporting software
Doing this allows you to report actual results against your forecast every month to show you where you are against your targets. You’ll also learn how to become aware and comfortable with your cashflow cycles and where you can improve them.
- Understand your Cash Conversion Cycle
Having a cashflow forecast in place is one thing. Using that knowledge to change how your cash flows is another. To do that, you have to understand your Cash Conversion Cycle, improve your business processes to shorten it, and set goals.
- Get a coach or mentor
Having someone to encourage and support you ‘work on your business’ is the fastest and easiest way to get ahead. It’s best to have someone outside of your family life and business, so they can be objective.
The difference between cashflow and profit
Now that you have your cashflow forecast in check, it’s time to understand the difference between profit and cashflow.
Here is a simplified version: Profit indicates the amount of money left over after all expenses have been paid. Cashflow indicates the net flow of cash into and out of a business.
It sounds like flowers and rainbows, but if you find yourself with cashflow issues or blocks, it can send your entire business into chaos.
There are many causes of poor cashflow, here are the top 7:
- Poor accounts receivable process – resulting in debtor days (the time between billing and banking) being too high, stifling your cashflow.
- Accounts payable process – a review of all supplier’s terms may identify ways to improve cashflow or just get better Terms of Trade.
- Carrying stock for too long – this might mean full shelves but an empty bank account. This is no different if you’re a service provider with work in progress that is yet to be billed.
- Debt/capital structure needs to be reviewed – perhaps your debt should be consolidated and paid off over a longer-term. Maybe you need to have an honest look at your drawings from the business, or the business needs an injection of capital to fund its growth. Often significant cashflow and interest charge improvements can be achieved with a regular review of existing debt.
- Overheads – every business should do a thorough review of its overheads every year.
- Low gross profit margins – this is another way of saying that your variable costs are too high. There is a large number of strategies you can implement to improve margins.
- Sales levels are too low to support overheads and other cash demands on the business – this comes down to how viable the business is right now. If the businesses in high-growth mode and sales are increasing rapidly, then the business needs finance to support that growth and we need to review a financing plan. If the business isn’t in growth mode, we need to focus on how we grow sales.
How to counteract the negative effects of the economy
With the loss of jobs and no tourism, the economy has taken a hit. This means when we all get up and running again, the ability to grow and build your business will be harder, especially with a tougher economy.
You now need to consider what might happen in your business as a result of tougher economic times and put some measures in place to counteract any (more) negative effects.
– Increase customer retention – Get to know your customers. Building a relationship with your customers increases their loyalty. It’s always easier to keep pre-existing customers, but making new connections will be harder.
– Increase leads – First, ensure you have a strong online presence. Most people find new products or services on the internet, so make sure you’re easy to find. Use Google My Business to increase your visibility in Google searches.
– Maximise your SEO ranking – Ensure your website is modern, demonstrates your value, and has clear contact information and calls to action.
– Turn those leads into customers – A customer should receive the same awesome experience, no matter which person they deal with or product/service they buy from you. Ensure you have a sales process in place and train the team on how to follow it.
– Make more money per transaction – The most obvious way to do this is to increase your prices. While discounting can be a good way to get customers through the door (online or physical), it can lead to a lower transaction value. Where possible, try to limit discounts and only discount end-of-line products or those becoming obsolete.
– Lower your cost of sales – Ensure you’re taking full advantage of any early payment discounts offered by your suppliers or contractors. Have a look at how you can give the same experience and quality at a lower cost to you.
How to improve your cashflow
There are hundreds of ways to improve your cashflow. As part of our service, we focus on how to improve your cashflow with practical and proven strategies relevant to your business.
Here are just a few ideas:
Make sure you have a robust process for debt collection and ensure you adhere to it. Consider outsourcing your debt collection to a third party.
Communicate your Terms of Trade from the beginning. Contact customers the day their invoice becomes overdue. Be persistent with your contact and try different methods, for example, phone, email, social media messenger, and traditional letters.
Get credit references or personal guarantees from customers, set credit limits, and require goods and services to be paid upfront.
Regularly monitor stock levels and get rid of obsolete stock.
Ensure you understand buying trends so you can plan for quieter times.
Create a personal budget and stick to the amount of the monthly drawing.
Consider financing asset purchases instead of paying cash outright.
Take the next steps to help your business succeed
As Richard Bach said: Every problem has a gift for you in its hands.
With the current circumstances, you can run or face what must be changed within your businesses with gusto.
Vibrant Business is holding a Cashflow Webinar so you can understand your business figures and inject more cash when it’s needed at any time of the year.
In this online training, you will learn:
- Your break-even point and how to reduce the cost of sales
- To identify management strategies to boost your cash stocks
- How to determine your Cash Conversion Cycle
- How to differentiate your business and prepare for economic downturns
- Simple tips and strategies to inject more cash into your business
It is happening on September 9, 2020, from 1-2pm AEST. Register to get your link to this webinar here.