The year 2020 highlighted to all business owners the importance of having a backup plan.
After many consecutive years of growth, there had been forecasts of a downturn. However, the downturn that took place due to the COVID-19 outbreak was a surprise to everyone.
If you’re new to business or you have set a goal to ensure your business becomes more financially stable, take a look at how to stay protected from a similar type of worst-case scenario.
#1 Understand why businesses fail
The Australian Securities and Investment Commission (ASIC) regularly reveals data about Australian businesses.
Some of the information shared relates to business failure. Recent results demonstrated that the top reasons businesses go under are:
- Inadequate cash flow
- Poor strategic management of business
- Trading losses
- Poor financial control
It’s not surprising that three of these four are related to money. To put it simply, your business needs money. Without it, it won’t keep going for long.
Once you understand why businesses fail, you’ll be even more motivated to stay on top of your finances and prepare for a rainy day.
#2 Prepare for a rainy day
Preparing for the worst means having extra assets on hand when you need them, hopefully in the form of cash or items which can be quickly turned into cash.
The first thing you need to do is be clear about your business’s cash flow, trading losses (e.g. how much money your business is losing) and the way your money is managed.
If you have a large team, you also need to be clear on how other people’s decisions are impacting your business balance sheet. There are many businesses which have gone under because the owner left the financial management to someone who they couldn’t trust.
To prepare for a rainy day, you need to know how to break even and be operating in a way that allows you to do that. This comes from having good cash flow, sticking to a budget and working on forecasting with your accountant so you understand what expenses you can expect to face.
A daily or weekly check-in with the help of financial dashboards will give you better transparency about what’s really going on with your money.
Read more: Financial dashboarding to stay afloat
From there, it’s a matter of putting some cash aside, or knowing exactly what you would do should you quickly need cash. Many financial experts recommend you nominate a percentage of your revenue and send it to a savings account each month. Your accountant will probably suggest you make a habit of this no matter what, or they may say do so until you have enough cash or assets to keep the company afloat for three months should something terrible happen.
To start saving, you may need to cut back on some spending. However, it will be well worth it to have a cash buffer in case you need it.
#3 Have a ‘battle plan’
While very few people were sitting around in 2019 predicting a pandemic would bring many businesses to their knees in 2020, forward-thinking business owners were preparing for a setback of some kind.
Worst-case scenarios can, of course, include virus outbreaks but they may also be theft, fire or storm damage, the collapse of a major customer or supplier, a recession or a lawsuit.
As well as being aware of their numbers and having savings, savvy business owners think about disaster preparedness. This may include modelling so you know how long your business could survive for with a drop in income. It may also be a matter of hiring a consultant and coming up with a few different ‘what if’ scenarios.
When you take the time to do this, you can put a few different ‘pivot’ plans in place which will allow you to quickly find a new supplier, start operating from different premises or switch what you produce to suit the current economy.
Insurance will come into play for things like theft or weather-related disasters so speak to a broker who can help you find the right cover for your business. Public indemnity is also important to protect you in the event of a lawsuit.
Being prepared for the worst also means having a loyal client base. If you’re engaged with your customers and provide them with the best, they will be more likely to stick with you when times are tough.
Need advice about having a business that will stay robust, no matter what? Contact CBQ Financial today.