Building Business Resilience Through a Financial Health Framework

By Kyle Johnson, Gnome di Plume Consulting, LLC, Program Mentor

Originally published on August 29, 2024 (www.childcareaccelerate.com)

In my first blog, I introduced a financial health framework (1) for business, which promotes activities that enable an entrepreneur to plan, manage and fund their operations. In this blog, I want to dive deeper into resilience, a key aspect of financial health, allowing a business to weather shocks and jump on opportunities.

Defined by the Merriam-Webster dictionary as “an ability to recover from or adjust easily to adversity or change,” (2) resiliency represents the flexibility, strength and reserve to both withstand a shock and bounce back. As described by the Financial Health Network (3), resiliency was a defining characteristic of businesses able to survive the pandemic.

While the need for resiliency is clear to most business owners today, the recipe to develop it may be less clear. Part of this difficulty lies in the nature of resiliency, which is in tension with a business’s natural pursuit of growth. For example, you can probably relate to the desire to have a strategic reserve of cash on hand for a “rainy day.” At the same time, you can probably imagine that if you had that cash on hand, there are multiple good uses for it today — hiring a support staff, repairing a work van, or fueling a new marketing campaign — all of which might be key to healthy growth! This is the tension between growth and resiliency, and a healthy tension makes for a healthy business.

Below are some actionable tips for building the resiliency of your child care center. Recognise the tension in each, and like a good workout, make an intention for how much “pain” your business can endure today to build muscles for tomorrow and beyond.

Identify Risks and Reserves

While imagining risks may seem like an exercise in negative thinking, being comfortable identifying worst-case scenarios and how you could address them will build your confidence that you can pivot to meet any challenge. Start by identifying risks to your revenues and expenses. What happens if your single-largest customer leaves? What would it cost (staff time, lost cashflow, marketing expense) to replace them? What happens if your largest customer segment (e.g., public pay or private pay, after-school or overnight) left, and what are the costs to replace them with growth in other segments?

On the expense side, what is the cost implication if your largest supplier leaves, and you need to replace with a more expensive competitor? What would be the cost impacts of inflation or supply-chain shortages on your largest category of expenses — food, fuel, labor? By estimating the time and cost of the above scenarios, you can determine what size you want your “rainy day” fund to be. It is probably not optimal to have cash set aside for every scenario happening all at once, but it is reasonable to set aside cash or reserve a line of credit to cover the single worst-case scenario, or the most likely. Experts recommend determining the size of your emergency fund and then adding some extra to account for unknown risks you weren’t able to identify. Research shows people consistently underestimate risks and the amount of cash they should save for emergencies (4).

Limit Your Losses

There are many structures and products available to limit your liability in worst-case scenarios, but many small-business owners fail to fully take advantage. Legal entities such as Limited-Liability Corporations (LLCs) C-Corps, S-Corps all offer protections to business owners. Speak with an accountant or lawyer annually to ensure your structure best serves you for your stage of growth and exposure to risk.

Similarly, reviewing your insurance coverages annually with an agent with expertise in the child care industry can identify gaps in auto, professional and general liability, as well as advise on emerging risks such as cybersecurity and fraud.

Carve Out Time — And Cash — To Jump On Opportunities

Resiliency isn’t all about doom and gloom; it also positions you to make the most of good news. Get proactive by reserving time on your calendar each month to read about emerging trends in your industry; new technology that can streamline your workflows, developments that might impact your customers such as work-from-home policies and trends, government grants and investments in child care infrastructure. Set up Google alerts to automatically receive a summary of articles on these topics using key words, as soon as they are published. Industry disruptions can be good or bad news, often depending on if you are ahead or behind the curve.

As you work to build your emergency fund, you can also budget an opportunity fund. This intentional set-aside can fuel unexpected but wise purchases such as new software, deeply-discounted necessary equipment, or even acquiring a competitor business on short notice.

Lastly, cultivate your resources and readiness beyond finances. Invest in your human capital with professional development, child care conferences, and strategic exercises for your staff. Build your social capital by joining a local business or trade association, and meet with your local bankers at least twice a year to keep them updated on your development. Establishing and maintaining relationships with informal advisors, potential investors, even job candidates you’re not quite ready to hire, can ensure you have connections you can draw on when opportunities arise.

Sources:

1. Financial Health Network (n.d.). What is Financial Health? https://finhealthnetwork.org/about/what-is-financial-health/
2. (n.d.). Resiliency. Merriam-Webster. https://www.merriam-webster.com/dictionary/resiliency
3. Cummings, L. (2020, September 8.). Risky Business: Pandemic Underscores How Strong Personal Financial Health Can Build Small Business Resilience. https://finhealthnetwork.org/risky-business-pandemic-underscores-how-strong-personal-financial-health-can-build-small-business-resilience/
4. Lee & Hanna (2022, January 1). What, Me Worry? Financial Knowledge Overconfidence and the Perception of Emergency Fund Needs. Institute of Education Sciences. https://files.eric.ed.gov/fulltext/EJ1347083.pdf

About the Author

Kyle Johnson is a business coach and co-founder of Business Services Collective, a nonprofit helping builders uplift their communities using a blend of coaching and direct service to help construction entrepreneurs increase their financial health and unleash their growth potential. In his spare time, Kyle enjoys cooking, cross-country skiing, and nudging people to take the first step toward their dreams.

Child Care Accelerate is an innovative business support program designed to help child care providers optimize their business operations in two months. Our customized coaching journey allows us to partner with providers on their self-identified goals and priorities and share tools to improve their operational efficiency, build financial capacity and sustain a competitive edge. To learn more about Child Care Accelerate, please email info@seedconsults.com.