Financial Budgeting and Forecasting During Difficult Times
The business plan you started with in 2020 may no longer be useful. The coronavirus pandemic has disrupted businesses in nearly every industry, and planning for the future is difficult. Deloitte describes the pandemic planning steps as respond, recover, and thrive.
Your business future may feel uncertain, but you have a number of tools that you can access. If you’re open to change and will put in the effort, you can create a plan to get past the pandemic. The experts at Raincatcher can help you make informed decisions as you plan for 2021 and beyond.
Do You Need to Pivot?
Steve Blank, an authority on business pivots, defines a pivot as a major change in your business model, and this Forbes article explains some famous pivots. As Forbes explains: “The most critical decision for an entrepreneur is to know when to stay the course vs. change direction.”
Is the Pandemic Forcing You to Change Direction?
We’ve all seen businesses pivot during 2020. Many restaurants have shifted from a “dine in” model to focus on carry-out and delivery. Doctors and other medical professionals have invested in protective equipment to see patients, and movie theaters are struggling to reopen.
Take some time to analyze how your business can operate moving forward. If you rely on in-person customers, it may take months or even years before customers are confident enough to visit your business as they did before. Companies that have shifted to a remote, online model may not return to the old way of doing business.
Your business plan may involve a hybrid approach. Maybe you serve customers remotely until a vaccine is widely available, then you return to the original business model.
Consult with a business broker at Raincatcher. They’ve worked with hundreds of business owners in a number of industries, and they can use their expertise to help you with the decision to pivot.
Once you decide on a direction, you can put a financial budget together. Below you’ll find some great tools for budgeting.
Using the Breakeven Point Formula
The breakeven point is the dollar amount of sales required to cover all costs (both fixed costs and variable costs). Here’s the formula:
Sales – variable costs – fixed costs = $0 profit
Most businesses have experienced a drop in revenue during the pandemic. If you’re operating at a loss, your first job is to get sales and expenses back to the breakeven point. Your costs require you to spend cash, and if you can return to breakeven, you will conserve your available cash.
If you need to pivot, you can run the costs and sale projections through the breakeven point formula. Assume, for example, that you own a restaurant, and that you’re shifting toward a carry-out and delivery model during the pandemic. State regulations allow you to operate the dining room at 25% capacity. These factors impact the breakeven point:
Lease payment: Your lease payments continue, even though you can’t use the physical space to serve as many customers.
Payroll costs: You can cut payroll costs, because you don’t need as many servers in the restaurant.
Food costs: The cost of food varies with demand. If your sales decline, so do your food costs.
Marketing expenses: You change your marketing to promote the carry-out and delivery model, and that shift requires an investment in marketing costs.
You can tweak the breakeven formula to compute target net income.
Considering Target Net Income
Once you reach the breakeven point, you can generate a plan to reach a specific level of profit, or target net income. Here’s the restaurant’s target net income for the last quarter of 2020:
$50,000 Sales – $27,500 variable costs – $20,000 fixed costs = $2,500 profit
The target net income is 5% of sales, which may be a reasonable goal, given the challenges that restaurants face during the pandemic.
Building a Sustainable Business
How will you grow your business once the pandemic is over? If you plan on selling your business at some point, this question is particularly important. Here are some strategies to build a business that can weather financial downturns.
Perform Research to Solve Problems
Customers buy products and services to solve problems, and you can perform customer research to uncover problems. Ask your best customers what they like about your business, and what you can do to help them.
If you manufacture hiking and camping gear, for example, customers may tell you about a product feature that solves a problem. If your best clients need a hiking pole that holds up better during heavy use, create it for them.
Improve the Customer Experience
Forrester’s 2018 report of customer service trends found that: “The majority (66%) of adults feel that valuing their time is the most important thing a company can do to provide them with good online customer experience.”
After the pandemic, consumers may still prefer an online shopping experience. Create an online buying process that is simple and easy to use.
Develop Monthly Recurring Revenue
Monthly recurring revenue is valuable, because you can spend less on sales and marketing and still generate business each month. Focus your marketing efforts on repeat business, and build a subscribed revenue model, if possible.
Track Your Cash Flow
In order to track your cash flow, first, you need to review your current cash management system and evaluate if you have a good process in place. You might have a good system in place to invoice customers but you do not have a good collection process in place to follow up on those invoices. Cash drives everything so you need to make sure your processes are working to collect and keep that cash.
The second component of cash management is managing the cash balances of the company in order to maximize the availability of cash. You can learn more about how to track your cash flow by watching this YouTube Video, How To Create Your Daily Cash Flow Worksheet.
Managing your business during the pandemic requires a big effort, and it’s tough to find time for planning. Raincatcher can help you to find an advisor to work with you to manage your cash flow and build value over time.
Work With an Expert
The experts at Raincatcher help owners in every industry increase their business value, so they can sell their companies. They can help you make decisions about a possible business pivot, and advise you on strategies to grow your business. When you’re ready to sell, they can serve as a trusted advisor and help you close a successful transaction.