Planning to get through... Covid-19 and your business

16 April 2020

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If you missed anything in our recent Covid-19 update webinars - heres a run down of some of the topics we've covered.

It was like a game of musical chairs as soon as the lock down was announced – the music suddenly stopped and business owners were scrambling to find a seat. To help everyone sit down and take a break the Government rolled out the wage subsidy. This came with a significant upside, but also a hidden downside – which will be the unraveling for many.

On the upside, it helped business owners sleep at night and keep their teams employed. Without worrying, many were able to keep their teams and simply push pause for four weeks. We could afford (mentally and financially) to wait for the economy to reboot and the music start playing again. 

On the downside though, it has shielded many businesses from reality. They may have been struggling before Covid-19,  cash-flow may have been tight, they might have been unprofitable, customers may have stopped showing them the love, or they may have been under-capitalised. Covid-19 will likely spell the end for these businesses. 

Successful businesses, both pre and post-Covid-19, need real alignment between their business model and their financial model. The question to answer is whether your new business model will give you the financial returns you need from your business.

The wage subsidy has also shielded strong businesses. It’s a temporary life-support, no day for celebration, which has distracted many from thinking about the future. They’ve seen it as a way to get through four weeks of lock down and are waiting simply waiting for the rock and roll to start again.

However, the economic tune will be considerably different as we exit lock down and head towards Level One. The song will not remain the same. For some, the end credits will start rolling. At the same time, others will be ready to rock and roll.

It’s cliched, but as business owners we all want more time to work on our businesses instead of working in them. Well, now we’ve got more time than ever to work on, not in – let’s use the time to create a plan for when the music starts again, rather than simply wandering into Level 3 dazed and confused.

Step One: Ask five questions

Ask yourself five questions to see how you can survive the coming four months. Focus on more than just the lock down period – you still need cash to get your business trading again.

1. How much cash do you have, how much can you get your hands on and when will it run out? Don’t simply dumping more of your personal cash into the business – if you’re lending to your business you should evaluate the decision the same way a bank would.

2. Based on current revenue reductions, how quickly will you burn through the cash? Our clients are getting data by talking openly with their customers about future spending expectations. All have been completely open and aren’t hiding behind “no comment”.

3. How could you extend your runway? What funding options do you have (asset finance, interest only, overdrafts, trade credit etc). Don’t jump though to take debt – it needs to be sustainable in the post-Covid world

4. How can you reduce your costs (nice to have versus essential spending)? Be warned though – don’t cut back too much. We still need to be able to make rain when the next song comes on. Also think about your spending at home – now might be a good time to cut the unnecessary subscriptions to tighten your belt (do you need Netflix and Disney+).

5. How can you mitigate your revenue loss? Who could you partner with? How could you change your product? How could you change your pricing? Simply saying “there’s nothing I can do to change it” and being strung out about your position isn’t good enough.

With clarity on these questions, you have a strong position to begin to plan for your business moving forward. 

Step Two: Make some assumptions

Next, understand the Four Levels of the Government lock down. Identify what you think each level means for your business, your customers, and your suppliers.

So if you’re a local coffee shop, does Level Two look any different to Level Three or Four? Likely not if you’re in a CBD – many will still be working from home so foot traffic will be significantly down. If you’re in a suburban area then things are likely on the up. People working from home will mean more people out-and-about during the week.

So while yes, your coffee shop is technically allowed to reopen, what does reopening mean for your business?

Then as we get more information, and information is coming at us on a daily basis, update your assumptions and feed that into your answers on the Five Questions. Be overly conservative and err on the side of caution. We suggest breaking down what each government mandated level means for you and your business and estimating your movement through these levels with flexibility. 

Step Three: Understand your profit, and your cash


Cash is always king. But, before you can capture the castle you need to be profitable. Converting profit into cash is something many businesses struggle with – even during good economic times (its partly why builders go bust during construction booms). It’s even more important now.

What we’re talking about is reducing the time between you doing a job and getting paid. For some businesses it’s completing work quicker, or invoicing quicker, or capturing more of the hours worked, or converting leads to “yes” faster. Ultimately, the quicker you move from job done to cash, the easier you’ll be able to sleep at night.

In the post-Covid-19 world, how will your cash cycle change? How often will customers pay you? How can you do more work for good payers? How can you sell more of what turns into cash faster?

Ultimately, look at what your bank balance is projected to be. How do these projections change as you work through different scenarios? Some scenarios will see you with enough cash to survive, while others may leave you with less than a quarter of what you need to survive. This scenario planning can help you draw a clear line in the sand to know when enough is enough for your business.

If you’re not sure of where to start, then talk to your accountant. They should be your first port of call and will be willing to help. Many (us included) have Government funding available to help you come up with a financial plan to keep your business moving. 

Step Four: Understanding your Business Model

When Covid-19 stops gate crashing, and the music turns on, what will your business model look like? Will you still be able to sell the same product, to the same people, with the same business plan? Likely not.
So, use this time to reflect on your current model. Then make assumptions about what the world will look like, and what your future model could look like. 

Yes, your assumptions will be wrong. But, as we get more data you can refine your assumptions and update the model.

Successful businesses, both pre and post-Covid-19, need real alignment between their business model and their financial model. The question to answer is whether your new business model will give you the financial returns you need from your business.


For example if you have a permanent 30% reduction in sales, will you be able to pay wages, rent, loan repayments – and still make a return for you as the business owner? If not, what can you change? 

As business owners, we can’t control Covid-19 or the Government’s response. We can only control, and be responsible for, our planning. We’ve got the time to work on our businesses, so use the time we’ve got to come up with a plan to make our businesses stronger than they were previously.

When the gatecrasher leaves, and the rain song stops playing, a new form of rock and roll will start again. However, the song won’t remain the same. Your business needs a financial plan to get through, otherwise you might be left dazed and confused.

If you have any questions, or need help kick starting this process please reach out - we're more than happy to help. 

Riann, Hamish and the Convex Accounting team.

 

HM v2

for more help feel free to reach out. Get in touch with Hamish Mexted