Was it just April when we were all scrambling to get emergency funding through the PPP Loan program It feels like it was longer ago than that. While the funding was a lifesaver for many businesses, for others, it was just a band aid that allowed you to stay in a holding pattern. Who knew that the crisis would last so long? The loans provided approximately 2.5 months of payroll funding, but what do you do when that money runs out and business is not back to normal?
Not many businesses can say that their PPP Loan will get their business back to pre-Covid19 levels of revenue or income. It may be that your business was very successful before Coronavirus hit or your business might have been struggling a little even before the crisis. There is pretty much no business that cannot benefit from a change in how they approach their businesses financial health.
Cash Flow analysis has never been more important, more beneficial, more worthwhile than now. You simply must be able to forecast what money you will be spending compared to what money you will be bringing in over the next several months so you know if you can make it, know how much expense to cut, know what strategies will help you not go under because you did not look ahead to avoid it.
Analyze Expenses: Be Brutal with what is necessary:
Go through every single expense category that had activity within the last 3 months to the last 6 months and being absolutely brutal, decide which of those expenses are critical to being able to generate income and thus pay for themselves.
Dues and subscriptions that are on auto pilot: Do you need them right now? Should you cancel them to save money? You can always re-subscribe again at a later date when you might actually have the time to utilize them.
That is a good example of the types of expenses that unless they are required to help you keep or increase revenue generating potential, then they need to be cut until you are in a different place financially where they once again make sense for your business.
Build a Projected Income Forecast
If you do not know how much revenue you need to generate to cover your expenses, how the heck to you successfully run a business? You have to have a factually based projection of how much income you can generate over the next 3 months, 6 months and 12 months so you can make other critical decisions. Without a revenue goal without a break even benchmark, I simply do not know how businesses make decisions.
Once you know your revenue goal, you can then break it down into the components of How Do I Generate This Income? How many sales a day/week/month do I need? How do we increase our average sale? How do I leverage current clients/customers to generate additional revenue? If you know the number you are trying to reach, you will make decisions and strategies to get to that goal AND you can communicate it to your staff so they know what they are shooting for.
Financial success for a business is more of a formula than most business owners recognize. It is A minus B equals net income where you can control aspects of both A (Revenue) and B (Expenses) more than you think. With a formula, it is less left to the universe to determine. You are in control AND it can be measured, monitored. Changes can be made to ensure better success. You have to know your formula! Break it down into pieces. I need to sell this much of this thing. I need these expenses in order to generate those sales. This is when I will run out of money if I do not do those two things. This is how I will survive the months that cash flow is not enough.
If you have a cake recipe, don’t you usually end of with a cake?
Don’t keep your head in the sand. Don’t avoid it because you are not sure how to do it. Just start putting the building blocks together. Ask your accountant to help you build the forecast and help you with cash flow. You will be so much better off for the investment of time and money. It is like a recipe. If you know exactly what it takes to make a cake, then you are 1000% more likely to end up with a cake than if you just start putting stuff in a bowl hoping for the best when it comes out of the oven.
We talk about this a lot because we know the power of planning, projecting and using cash flow analysis. See our previous Post on Cash Flow is King https://www.oconnorcpafirm.com/blog/2019/08/19/cash-flow-is-king-for-a-small-business/