Part 1: Figure Out Your “New Normal”

The Financial “Survive and Thrive” Plan for Entrepreneurs: COVID-19

We are clearly facing “a new normal”.

I am not overly worried about the health impact of COVID-19 for myself. I am a healthy, non-smoker in my mid-40s. Even if I do get sick, I am not high risk. Like many, I’m not worried about myself, but worried about being a carrier and passing it on to someone who is high risk. That’s not what this article is about.

Also, like many, last week I was inwardly eye rolling at the mania that’s been happening. But that’s when I started hearing stories from entrepreneurs I know about laying off 80% of their staff. That’s when I heard about entrepreneurs I know losing 90% of their revenue. In Canada. In Vancouver. And, in cities across Canada and the US.

That’s when it all changed for me. That’s when it occurred to me just how impactful this is going to be. For all of us. While I’m confident the health issues will be resolved in a relatively short period (at least, as confident as a non-expert can be), the financial impact will linger much, much longer.

The goal of this series of articles (The Financial “Survive and Thrive” Plan) is to help entrepreneurs figure out how to financially survive this crazy period and then get set up to thrive when things start to rebound. This is a crisis, which is a great time to reinvent yourself and your business. We are all going to get hit by this and in order to get through it, we must work together, suffer a little together, financially survive together and then thrive together! These articles will be written purely from a financial lens, without any commentary on the health side of the issue. If you have thoughts or comments on other content or support, please feel free to connect with me directly.

I am not an economist and will not venture a guess on how deep or long this financial setback will be (nor will I label it with economist-type terms). My belief it is will be VERY deep and a LOT longer than what I perceive other people expect.

PART 1 — FIGURE OUT YOUR NEW NORMAL

Knowing where you stand and, more importantly, where you will stand after making adjustments on both the revenue and costs side will be immensely helpful in making strategic decisions about how to get through these tough times. Start by figuring out your “new normal”. This is boring accounting stuff that I usually encourage entrepreneurs to push off to your accountants. Not this time. Sorry. You need to jump in here and understand exactly what’s going on.

Yes, there are lots of creative things that can be done to pivot and reinvent in this crisis environment (and I’m talking about positive and forward-thinking pivots, not gouging or taking advantage…we are all in this together and need to support each other, not take advantage)! Before you do, it’s important to have a look at the new reality of your current business so you can be in a better position to make strategic decisions for the business.

Here’s what to do:

1. Figure out your “new normal” revenue

The best way to go about this depends on your business. If you have a relatively small number of clients (say, under 100), go through each customer and apply an expected possible reduction of sales for that customer. Call them, if you can. Get a sense of how their world is shaping up. You might learn something that could help you pivot to something they really need while showing you care about their business. Will they completely go away as a customer (or a business)? Will you need to offer a discount to help them through it (really consider being proactive about offering discounts to really shore up the long-term loyalty of those customers)? Or, are they likely okay to continue buying your products/services at their current levels? Be conservative. If you think a client is at risk, they probably are.

If you have a high transaction business where contacting each customer is not possible, consider reaching out to a few clients to get a sense of their mood and get some insight as to how that “category” of client might respond. Then, do the same exercise as above and assign a conservative reduction in sales based on segment, division, category, or however you look at your business. Again, be conservative. Times are going to get tougher before they get better.

Now you’ve got your new normal revenue number and have the first thing you need to start making decisions. This is before adding any creative or strategic ideas to bolster sales. We’re just trying to get a picture of where things stand with the current business.

2. Figure out your “new normal” expenses

It’s time to cut deep. In preparing for reduced revenue, you obviously have to cut as many expenses as possible.

This is a line-by-line exercise going though all expense items on your income statement, including cost of goods and operating expenses. For each line, have your accountant give you a breakdown of the expense by supplier. That way, as you’re going line-by-line through the expenses, it will be way easier to see which suppliers you can cut, rather than taking a stab at an overall reduction of “office expenses”. You can probably cut out stationary costs (Staples expenses), but not your phone (Bell Canada). Or maybe you can decrease your phone bill by 20% by reducing number lines, services provided, etc.

There are tons of ways to creatively reduce costs. Question every cost and consider how to reduce. Voluntary reduced hours by staff? Calling suppliers for alternate / more cost effective solutions? Heads up that “Step 2 — Ways of reducing your costs that you might not have thought of” is the subject of tomorrow’s article.

Once complete, you will have a picture of your new normal expenses.

3. Take a hard look at your “new normal” profitability

Your “new normal” revenue minus your “new normal” expenses (including your cost of goods sold) is your “new normal” profit.

Are you one of the lucky ones who can make these changes and still be in the black? Or, are you still showing a big red number and feeling the pressure?

Either way, having completed this step (and you may need to run this several times over the next few weeks/months as things evolve) you have gained clarity, even if bad news, to know how big a challenge you have in front of you. Maybe hunker down mode and stay just above breakeven is the goal to return to your former glory? Perhaps the scope of the new normal losses means you will be forced to make a much bigger and dramatic change.

Either way, this level of clarity is critical. I get it. It’s not sexy and it’s not fun to sit with your accountant and grind it out. You may even get a bit nauseous when you see the result. Do it anyways. The clarity will set you in the right direction and provide peace of mind knowing how big (if any) gap still exists after taking the first round of prudent action.

4. One important calculation here — Understand your transition costs

Before moving on to Step 2, “Reducing your costs in ways you might not have thought of” (tomorrow’s post), get clear on how much it will cost (or save) to implement the changes to get to your new normal.

Will your customers immediately reduce purchases, or will it take a couple months? Can you stop your costs immediately, or will it take some time when considering notice periods to providers and staff?

Sit with your accountant and figure out how much this is going to cost (or generate) and take one last step.

5. Put it together and see how much time you have to figure out a plan B (if needed)

You’ve got your “new normal” profitability. You’ve got your transition costs. You’ve got your bank account. Now, line them up.

A quick look at this should show you roughly how much time you have left. If your new normal loss is $9,200 per month, your new transition costs are $23,763, and you’ve got $50k in the bank, under these new normal conditions you have about three months to figure out plan B. Of course, you and your accountant will need to consider your current AP list, AR list (who will and won’t pay) and any other payments that will dip into the $50k in your account, such as loan payments (the subtle and technical difference between profit forecast and budget.) Get an accountant to help you with this if you’re uncomfortable with the terminology.

While it wouldn’t normally be good news to find out you only have three months of cash left, the good news here is now you know. You have clarity that based on your quick and dirty calculation, you NEED to do something to find a way to extend your runway and or make changes to the business so you can be in a position to thrive when things start to rebound.

The whole objective of PART 1 is simply to gain clarity. What is your new normal and how much time do you have to figure out a plan to financially survive this cycle? No need to make the numbers perfect. Your objective is to paint yourself a realistic picture until things start to rebound.

Next article — “Part 2: Creative ways of reducing your costs you might not have thought of”. Pretty self explanatory. I will jump into a few creative ways of reduction costs you might not have thought of. I know that sounds sexier than step 1, figuring out your new normal, but please, please take the time to figure this out. It will serve you tremendously!