More Musings (Volume Two)
Well another week in and all is well. Well, not really because reality has started to hit and people are starting to realise that the sky in their world is now a different colour. They are also thoroughly sick of being cooped up at home. On the brighter side, people have had a chance to catch up on all those chores that were put off for too long and reconnected with family. By now, hopefully, business owners have started thinking about life after lockdown.
Down the Rabbit Hole we go
Below I elaborate on some of the topics from last week and provide some other pointers on dos and don’ts. There is no rulebook here and we couldn’t find someone from the Great Depression to provide even some remote guidance on what to do and what not to do. No doubt in a few years time some clever academic will come up with a book on who should have done what. In the meantime we are taking very fast swimming lessons whilst attempting to write a new rulebook and home-school the kids, all at the same time.
But first, a magic trick.
Break Even
I’m not a magician, but I can show you a magic trick for working out your “break even”. This is fancy terminology for how much income you need each month to not make a loss or a profit, just to “break even”. Hence the name – okay accountants aren’t known for their creativity (those that are normally end up in prison).
Firstly, you need to work out your “gross margin” or “gross profit”. This is simply your total income for the year less your direct costs (sometimes called “cost of goods sold”) in achieving those sales. If you look at your financial statements for last year you will see this figure expressed in dollar and possibly percentage terms. You need the percentage (simply divide the gross profit by the total sales for the year to express it as a decimal e.g. 0.40).
After you have done your planning you would have reviewed your expenses and determined which could be trimmed as non-essential. This leaves you with the bare essentials that you need in order to keep the ship running (rates, rent, power, insurance etc.). These are called your “overheads” and you will generally incur these irrespective of how long you are open for.
Take your revised total overheads figure for the year and divide by the gross profit decimal you calculated above. This gives you the required income for the year in order to cover all of your overheads (break even). Divide this by 12 to get a monthly break even income figure. This is the income figure you need each month in order to break even.
For example, if your overheads were $100,000 and your annual gross profit percentage was 40% the break even calculation would be $100,000 / 0.40 = $250,000 income per annum (or monthly income of $20,833). Anything above this and you’re making money. Anything below this you need to review the plan.
Magic made easy – I didn’t even need to pull a rabbit out of a hat.
Business Survival Rules
We’ve all seen the nice rules about surviving lockdown. These generally relate to tolerating other people (usually idiots in your view) and family members (sometimes idiots with annoying habits that you’ve discovered after a month of lockdown). However, the rules haven’t really touched on what you, as a business owner, should be doing as regards your business.
We addressed the golden rules around cash flow forecasting and planning last week. Below are some further suggestions.
To Thine Own Self be True (for the Hamlet fans)
You really need to stand back and look at your situation independently (yes I know, easier said than done). If you struggle with this, then find someone to use as a sounding board. They need to be someone that is objective and prepared to say what needs to be said. Maybe not your Nana then.
You need someone that is going to tell you the truth, however much you may hate hearing it. Brutal honesty will get you through, living in Lala Land will not. Deep down you will know the truth when you hear it, despite how unpalatable it may be. You need to address the elephant in the room or it is going to stand on you (I’ve moved on from trains since the last newsletter).
Be Brave
Someone I spoke to was worried that they will need to make redundancies as part of a restructure. They pointed out that the staff they had employed had been their friends for many years and they weren’t sure they could “let them go” (a nice euphemism for making them redundant). I said that if they didn’t “let them go” then they could reminisce about the good old days (with appropriate social distancing protocols in effect) as they all stood waiting in the dole queue. Brutally honest, but it needed to be said.
The point here being if your current picture of the future is of a dead duck then you need to do something about it. I’m no physics expert, but my understanding is that a dead duck will only fly so far. In Darwinian terms, your business needs to adapt or die. You need to be brave in order to make the required changes to achieve this. Not all of your competitors will adapt to the new world.
Although the task may appear insurmountable, remember, the trick to eating the elephant is one bite at a time.
Be Flexible
I’m also no yoga guru, but I know that the world will be changing very quickly so business owners will need to be very flexible in order to survive and thrive. Don’t get caught dogmatically sticking to the new master plan and refusing to see what is happening around you. History is littered with examples where people have failed to modify their plans despite the obvious need to, with disastrous results.
Look Around You
I’m also not an optometrist, but I realise that sometimes people struggle to see the obvious until someone points it out to them. Fighter pilots call this situational awareness. Stay up to date with world and business events and read widely from a range of authoritative sources. Having a sounding board also helps with this. Review the plan regularly and update it in the light of what you discover. Then stress test it to ensure it is robust.
Stay Focussed
Don’t get stuck in conspiracy theories or be the person asking Dr Ashley Bloomfield whether eating four onions a day will prevent Covid-19 (yes really). By all means be aware of what is happening around you but don’t get distracted with the unimportant stuff. A major issue for business owners is that they tend to get stuck with the “Urgent but not important” category of work (google “The Eisenhower Matrix”). This happens in the best of times; under the current climate it will no doubt prove to be an order of magnitude worse.
You need to keep focussed on the big picture and how this is going to play out. This then allows you to determine what chess pieces you need to play (still no trains).
Remain Ethical
Although cash flow may be king, your kingdom will be doomed to failure if you mistreat people now. You need to maintain an ethical approach in dealing with both customers and suppliers in order to ensure longevity i.e. give and thou shalt receive. Keep the money wheel turning (no doubt I’ll get some conspiracy theorist email me about this).
We have all been in the position where we have had customers contact us to advise that they are “caught short” this month and ask if they can delay payment of their bill. The majority of us do what we can to accommodate them as we have all been in similar position at some stage or another. We do what we can to help each other when we can. This allows us all to survive.
Whilst deliberately not paying your creditors will improve your short term cash flow position, people have long memories if you take the Mickey. You will need your suppliers in the long term if you are to survive. I’m also not an ornithologist, but I understand that birds do not do a certain something in their own nest.
Don’t be an Island
I’m also not a geographer, but I know that no man is an island. You can’t do this on your own. If you need help, don’t be afraid to ask around. Understand that you aren’t operating in a vacuum. There are support mechanisms in the most unlikely of places in order to keep your business going and your cheese on your cracker. Talk to family, friends, and business associates to share ideas on what works and what doesn’t.
Talk to Your Advisors
I am, however, an accountant and what I do know is that there are a multitude of possible options available to help businesses over the next few years. Our aim as a firm is to get as many businesses as we can through the trying times that are coming. It won’t be easy, but we will endeavour to do our best by our clients. If you have any concerns, please do not hesitate to contact us.