With the coronavirus spreading rapidly and government mandates to stay home changing daily, many things are uncertain. We don’t know how long we’ll be asked to stay at home or how the coronavirus will affect our local economies. All of the unknowns make it more challenging to run a small business. This article is to help you take the time to go through some financial planning and help you lead your business through this period of uncertainty.
The Importance of Financial Planning
As a small business owner in times of uncertainty, you may have some tough decisions to make. For example, in response to COVID-19, you need to create a business response plan and decide if it’s best to stay open or close your doors for a while. If you stay open but have fewer customers, you’ll need to decide how to increase revenue and/or cut expenses. If you close your doors, you will need to decide how to keep your business healthy until you can re-open.
As a business owner, finding the time for financial planning can sometimes take a back seat. But if you stop and think about it, your company’s finances are the most important part of your business. You need to be able to turn a profit in order to keep the business healthy and provide incomes for you and your employees. If you’re experiencing any downtime, now is the time to plan ahead and make decisions to help your business ride out the storm. Below, we outline the steps of creating a financial plan during times of uncertainty.
Step 1: Review Past Income
To start, let’s take a look back at your past income. This gives us a good baseline to work from moving forward.
First, pull up all of your paid invoices from 2019. If you don’t have a spreadsheet or a program to keep all of your invoices organized and in one place, you should make one now. Here’s a template from Microsoft that can help you organize your invoices in a spreadsheet. If you use Mobile Tech RX, you can find your invoices by going to the ‘Documents’ tab in your Admin Portal and clicking ‘Invoices’.
Adding up the amount you made from all of your invoices will give you your total revenue. Add up your total revenue for 2019 and then break down your revenue numbers by quarter (every 3 months) or by month. Now you know how much money you made last year and in different parts of the year. You should also look at your income for the first few months of 2020 and see how it compares. Are you pacing higher than last year? Lower? Can you use last year’s income to predict how far ahead or behind you are from what you expect to make?
It’s a good idea to do this for every year you’ve been in business. This can help you track trends or seasonality and see how your business revenue is increasing or decreasing over time.
Step 2: Review Past Expenses
Of course, your income is only half of the story of your business financials. Using the same timelines and the same tactics, you should also review all your past expenses. Your expenses include anything you’ve spent on your business. Expenses could include your employees’ pay, tools and supplies, products, taxes, and rent. If you’re a mobile business, you’ll want to include the cost of gas and any additional wear and tear to your vehicle to your expense report.
Step 3: Calculate Past Profits
Profit is the most important metric to you as a small business owner. You want to make sure that you are making more in revenue than you are spending in expenses. To calculate your profit, subtract your total expenses from your total revenue.
Step 4: Take Stock of Your Current Situation
Now that you’ve calculated your revenue and expenses, were you profitable last year? What about each quarter or each month? Now that you have your baseline, you can start thinking about now and the future.
Look at the very recent past and see how it’s compared to the past. Are you on the same track of growth or are you bringing in significantly less revenue?
During this time, it’s the best way to measure how COVID-19 is impacting your business. If you’re far behind last year’s income at this time, it could be smart to aggressively cutting expenses. If you’re on pace or ahead, you can be more conservative. Doing simple forecasting like this also helps you build triggers for the future. You can build a list of expenses to cut if your income slips beyond certain percentages of last year’s income on future dates.
Step 5: Forecast the Future: Financial Planning for Multiple Scenarios
Using the information you have, now you can forecast your profits, revenue and expenses for the next few months and the rest of 2020. A forecast is using past data to predict what will happen in the future. Based on the trends of the past, what kinds of revenues and expenses do you think your company will have in the future?
Since a forecast is only a best guess, you should have a few different cases depending on what happens in the future. You should have a plan for the best, average, and worst possible scenarios. Your worst scenario could be closing your doors for a few months; your average scenario could be that your customers drop by 50%; your best scenario is you aren’t affected.
Now you know where your business will be in a variety of different scenarios. If it looks like you won’t be bringing in much revenue, this is a very good time to start cutting back on expenses.
Step 6: Set Performance Triggers
A performance trigger is a business metric that shows you your business health. Keeping an eye on your performance triggers can help you notice significant business changes and make decisions to keep your business healthy.
Examples of triggers that you should keep an eye on are revenue, profit, and cash flow. Here are some examples of how you can set performance triggers:
- Cash flow is negative for two to three months.
- Your revenue numbers miss your forecast by 5 percent two months in a row.
You should use triggers to help you know when it’s time to make certain decisions like cutting expenses, laying off employees, taking out a loan, etc.
Step 7: Make Multiple Plans
Make plans for different scenarios that can ensure you stay in business no matter what happens. If your revenue doesn’t hit a certain number, you need to find expenses to cut back on. If your customer number is cut in half, you probably need to cut back your employees’ hours. And if your customers drop to zero for a period of time, you might need to consider layoffs.
There are numerous factors to consider, but the more you are prepared, the more likely you are to survive.
Start Your Financial Planning Today
It’s not your fault if you didn’t make a plan for how your business would respond to a global pandemic. No one could have predicted the way that coronavirus has spread so quickly and affected daily life so drastically. Everyone has been taken by surprise and feels uncertain about what to do. So, don’t get discouraged. We can’t plan for everything before things happen, but we can plan a response quickly!
Mobile Tech RX is currently offering free analytics to help small business owners make decisions during uncertain times.
For more information and resources on how to protect and grow your auto recon business, visit our Resources Page. Please let us know if there’s anything we can do to support you and your business during this time.