Author: Tony Rule, Partner, TAG Financial Services
In case you missed it we are now in the second week of June 2020. In a few short months, the state of business has changed for the next few years – and possibly forever. Therefore, business owners should be asking themselves – what is my strategy now?
JobKeeper has bought business owners six months of support while we work our way through this new business world. Come September, that artificial support will be removed, and businesses will need to be able to stand on their two feet again.
If your industry only bounces back to (for example) 80% of your pre COVID-19 activity, your previous net profit of (for example) 5% may now be negative 4% – for example a business that was previously turning over $10 million and making a profit of $500,000 will now be making a loss of $300,000. In this example, without a plan the business profit will drop by $800,000. This will quickly come to light when the JobKeeper payments stop flowing into your bank account.
| Pre Covid-19 | Post Covid-19 (80% of sales) | |
| Sales | $10,000,000 100% | $8,000,000 100% |
| Cost of Sales | $6,000,000 60% | $4,800,000 60% |
| Gross Profit | $4,000,000 40% | $3,200,000 40% |
| Operating Costs | $3,500,000 35% | $3,500,000 44% |
| Net Profit / (Loss) | $500,000 5% | ($300,000) (4%) |
Assuming you have your JobKeeper ducks in a row, your focus should now be on how you will lead your business into our new future. How do you position your business to emerge from the pandemic in the best possible condition?
Where are you now?
There are two key questions that I need you to answer (honestly).
Firstly – how has the Coronavirus impacted your business? Are you still trading and to what extent? How have your customers and suppliers been impacted? Will your business return to “normal”? Mark your business as either severely or mildly impacted.
Secondly – how were you placed when the Coronavirus arrived? Did you have your “fighting fund” in place? Were your debt levels under control? Was your business meeting its financial budgets? Mark your business as either strong or weak.
Now – which quadrant do you belong in…
| Mildly Impacted | Severely Impacted | |
| Strong Business | Growth | Diversify |
| Weak Business | Rebuild | Crisis |
It is very confronting to boil all businesses into four distinct groups – but this is your new reality. Your immediate strategy is now based on where your business was placed and how badly your business has been impacted. What does each of these categories mean?
Growth
This is obviously the best place to be. Your strong financial position has put you in a situation where you can take advantage of the carnage going on around you.
Competitors in weak positions will be under financial pressure and will be focused on survival. Some of these businesses might be available to be purchased at a significant discount because tired business owners want out. Strategic business purchase opportunities might allow a strong business to snap up market share, key customers, extra capacity and/or good team members. That fighting fund that you have been saving for a rainy day – time to release some of those funds to really kick your business along. Sometimes in business acquisitions, one and one does equal three.
If a business acquisition is not your thing – consider expanding your sales and marketing reach. As competitors stumble around you, now is the time to double down on your sales and marketing effort. You have a great story to tell and you should be singing it from the rooftops. Yours is the business that stood firm against the tide and your prospects should be hearing how supply to your customers was unaffected.
Homework – consider “where to” next. Do you want a bigger piece of what you are currently doing, or is it time to step into new products or services? Develop your strategic plan.
Rebuild
The last three months have not been pleasant. There might have been a number of lessons learnt about the lack of systems and procedures in your business. Meeting the cash flow requirements of your business has probably been difficult. You may not have been able to retain all of your key team members. Where to from here?
Time to build the business up again, but this time let’s do it properly. You will need a profit and loss budget and a cash flow budget. You will need to build a fighting fund to keep you off your knees. Your fighting fund will allow you to be strong in a crisis and take advantage of opportunities in good times. Building your fighting fund (a reserve of cash for the business) should be your number one priority. This will guide you towards a stronger business.
Homework – build your profit and cash budgets based on your key focus areas. What KPI’s do you need to have in place to make the business “lean and mean” and build your fighting fund to put you into a position of power.
Diversify
Your strong business has been hit hard by the pandemic, but your decision right now needs to be whether you stay in your current industry in your current position or do you manoeuvre your business into a better place. How did the pandemic effect your business and is the effect temporary or permanent? What are the chances that it will happen again?
Your strategy will probably require you to diversify into a new niche. What are your options? Business purchase, recruiting new expertise or is it just a subtle change that is needed. Based on your current cash flows, how long do you have to transition the business?
Even if you expect that your business will bounce back, what will be your back up plan for the next longer or deeper lock down?
Homework – how do you make your business more resilient? How can you position your business ahead of your competitors to be less impacted when the next crisis hits?
Crisis
First- take a deep breath. Look at your cash flow – based on your current trajectory, when will the money run out? You now know how much time you have to make the changes you need to make.
What actions do we need to take right now to save the business. This involves looking at the both your business and your industry. If your industry is going to bounce back, then the goal needs to be to do what you need to do to survive. This will involve negotiating with all inputs to your business including employees, contractors, suppliers and your landlord to get whatever discounts and deferrals you can. You will also need to have an eye to October – what will need to happen when the JobKeeper payments stop?
If your business situation is truly dire and the outlook for your industry is particularly severe, consideration may need to be given to selling, restructuring or winding up the business.. Each of these options have many possibilities and risks and professional advice should be sought to find and negotiate an optimal path. Putting your head in the sand is not a viable strategy.
Homework – get your cash flow together, work out how long you have got and then negotiate and seek advice.
The Final Word
JobKeeper payment ends in September – leaving you with four months to get your business ready to perform without a safety net.
If you have any questions, please contact us on 03 9886 0800 or via email.
Disclaimer: The information contained is general in nature. Professional advice should be sought before acting on any aspect on this page. Financial planning services provided by TAG Financial Advisors Pty Ltd (ABN 77 154 205 017 AFSL 415632), a wholly owned subsidiary of TAG Financial Services Pty Ltd (ABN 67 075 374 686). Copyright 2020. Please do not reproduce without the expressed written consent of the author.