If your business is under extreme stress, then time can run short to develop long-term plans for recovery. If access to money is all you need and the core demand is still sound, then you’ve more options compared to a business which is failing to cover overheads and no improvement is in sight.
We have four business resilience strategies in your time of need.
Strategy One; Emergency surgery
If you’re facing an immediate crisis and the very viability of the business is at risk, as well as your own equity or financial security, then you probably have three choices.
1.Trade out of trouble
If you’re determined to keep the business intact there are some things you can do to increase the chance of surviving. Initially focus on selling current products or services to your existing good customers, as it should be the easiest to do. They know you. Then contact the rest of your customer database with phone calls, emails, visits, social media or e-newsletters with special offers to cross-sell or up-sell to other product lines.
Next, look for wider opportunities to increase sales as some industries or markets will be doing better than others. There are a number of ideas you could investigate including:
- approaching new customer segments
- diversifying by branching into new products and services
- moving parts of your business online
- marketing in regions traditionally outside your area
- selling through online marketplaces
- using social media sales platforms (Facebook, Twitter, Instagram, Pinterest, YouTube etc).
You could also look at partnering or collaborating with other businesses, some who may be struggling but others will be thriving. Do whatever it takes to keep your business afloat until the market corrects itself back to business as usual.
2. Re-structure
If drastic action is required, think about keeping the parts of your business that work and reinvent or re-structure your business to adjust to the new normal. Take a close look at what can be salvaged and then act like a new start-up to build a new, stronger business on the foundations of the old one. What would you do differently and how would the business look?
You may want to:
- delete unprofitable product or service lines
- close down parts of the business that no longer contribute
- sell or lease assets not needed
- change the expertise mix of your staff (possibly letting some go)
- invest in new research and development.
If you can, establish one or more identifiable target markets and then design your business around providing an exceptional service offering in that area. Customers will still need to know what is special about your business to set you apart from your competitors, so try to differentiate with unique products and services.
Once you decide to restructure, obtain as much input as you can from your advisors, existing staff, industry experts and those you trust for business advice. Don’t forget to search the internet, subscribe to industry news, visit business association sites and talk to suppliers to validate your ideas.
3. Sell and move on
If options one and two are not viable for you, it may be time to move on and either close the business down or sell what you can. If you’re thinking about selling your business, it’s crucial to work through the details that will help you increase your price and make your business more attractive to potential buyers. If you can sell the business as a going concern you should return more than just selling any assets, inventory or premises.
To reduce the risks involved in moving on, employ experts to help guide you through the steps, from preparing to sell, putting the business on the market, through to completion of the transaction and handover. It’s a good idea to talk to your accountant and lawyer and to consider working with a business broker to assist with a sale.
Talk to your business partners, family or other business owners and seek expert advice from your business adviser, accountant or industry support if you’re unsure what to do: trade out, restructure, close or sell the business.
Strategy Two; Strengthen the foundations
If you are struggling to find customers due to an unexpected crisis, the need to avoid running out of money is critical to keep the business trading to buy time to recover. Here are some ways to create a stronger business.
Build short-term cash reserves
If you don’t have cash savings then you may be able to free up cash within your business to tide you over. There could be machinery you no longer need, or vehicles which could be sold and turned into cash. These could then be leased back when you need them.
Other ways to raise extra working capital include:
- selling parts of the business
- liquidating excess inventory or raw materials
- re-investing your own capital
- refinancing against your existing assets
- finding external investors.
Look closely at the business assets on your balance sheet to see what you don’t need and consider what you can convert into cash without impacting your core business.
Review how you operate
Now is the time to make permanent changes to strengthen your business, which are often things you’ve thought of doing but haven’t had the time, or didn’t need to do as sales were steady. This includes how your business can operate more cost effectively while maintaining or improving efficiency.
Take time to document every step of your business process to improve your capacity to do more with less. Other ways to be more resilient include:
- having more than a few customers or segments to rely on
- diversifying into new growth markets (even in times of crisis some businesses will thrive)
- widening your product or service mix
- negotiating new terms with suppliers
- amending your terms of trade to collect money faster
- axing any part of your business that doesn’t make a profit
- scaling back non-essential staff
- focusing on core business.
There will be a number of key decisions to make your business leaner and meaner and it’s likely you’ll instinctively know what needs to go and what needs to stay.
Maintain your margins
A reduction in gross profit is a key warning sign that hints at a deteriorating cash situation. Monitor the things that can negatively affect your gross profit margin such as:
- increases in raw materials or product costs
- reduction in profitable sales
- discounting by staff
- wastage during production
- a loss of quality which increases customer returns
- late paying customers.
Select the two or three key warning signals that matter to your business and then set up regular monitoring to remedy any decline.
Tighten credit control
An efficient credit control system helps speed up your cash collection and reduces bad debt by limiting how much credit you provide to customers. You could consider collection options such as:
- requesting deposits or progress payments
- using credit scoring systems and setting appropriate credit limits
- credit checking all customers
- monitoring late payments
- setting up a process to follow up with debtors
- charging interest on late payments
- as a last resort, using a debt collection agency or specialist lawyer.
Identify future cash flow
Sketch out a number of cash flow scenarios to identify what your business would look like in the future where sales drop (or cease) over a period of time, and develop contingencies in advance. For these scenarios you could consider:
- costs you will no longer have
- extra cuts you can make
- the impact on gross profit and margin
- the revenue you need to break even
- the length of time it takes to recover
- tighter controls over inventory to service customers just in time
Each drop in sales will usually have a corresponding fall in variable costs (materials, cost of goods sold), but at some stage you may find it’s uneconomic to continue with certain products and services if the fixed costs are too high. In these cases, you may have to lower your overall cost base (possibly making staff redundant, move premises, or close less profitable product lines).
Protect your supply chain
It won’t only be your business that’s impacted by a crisis. Outline what may happen to your key suppliers and identify risks to your business if they were suddenly no longer able to deliver. This is especially critical if you have exclusive or hard to replace materials or products as part of your own delivery to customers.
Develop an alternate supplier plan and consider reaching out to these businesses as back-up if your existing supplier can’t deliver.
Your future plans
You may be able to pivot your business to find new revenue streams through finding different customers or markets, developing new products or services, or finding new ways to sell to your customers. Outline what you aim to implement to bring your business back to positive cash flow and then profitability.
Strategy Three; Increase profit
There are generally five ways to increase your profit in your business, each having a multiplier effect. Rather than trying to double your sales which is often difficult to do in a short period of time, you’re better to try and increase each of these five aspects by 10% for cumulative results.
1. Increase your leads
First, build the number of prospective customers. By interacting with greater numbers of people, you’ll increase your chances of turning more them into customers. Make more people aware of your business by:
- identifying your most successful promotional tactics and repeat. Don’t worry about why they worked
- profiling your best customers and contact them directly
- attending industry events and conferences to meet potential customers
- re-developing your website for new SEO opportunities
- developing new distribution channels – think about using agents, licensing your goods, or using new distributors
- asking current clients to provide referrals
- actively ask people to get in touch by creating calls to action or incentives through promotional material, your website, blog advice, social media platforms, and free trial offers
- running webinars or speak at events.
Anything you can do to get in front of new customers is a valid tactic.
2. Convert more of your leads into customers
Once you have more leads, increase your conversion rate. Even converting ten percent more into customers should generate significant sales.
Measure your current conversion rate (for example number of unique users to your website divided by the number of online sales) and then consider the following:
- plan training for staff on selling techniques and closing methods. Provide staff with incentives or bonuses for higher conversion rates
- run demonstrations for potential customers to see what you have to offer and how they could benefit. Sign them up
- create whitepapers or research content to encourage people to register or download content for you to then follow up and close the sale.
You can also consider running loss leaders: products or services at below cost to convert customers across to your business and then sell to them over their lifetime value.
3. Increase the number of items you sell per customer
If you can entice your customers to buy just one more item, or hour, or extra service from your business, your sales (and your profits) will increase. On-selling is a classic tactic to improve your profit.
Tactics include:
- adding impulse/lower cost products at checkout or a final sell when closing
- asking customers what else they would be interested in buying from you and then widen your product range to accommodate their needs
- bundling products together
- offering complementary services
- researching competitors to find new product or service opportunities
- adding services if you sell products, adding products if you sell services.
4. Increase your average sale
If you can increase the average value of each sale, you’ll directly improve your profit. Try:
- listing your highest margin products and services. Check that they are profiled on your website, that they have the most promotional budget allocated to selling and that they are the first products to be sold
- ensuring all employees know to sell those products with the highest average sale price and there are incentives when they sell.
- increasing prices. Even small improvements (like one to five percent) will show direct profit results
- introducing new premium products or services that have a higher value.
5. Increase net profit percentage
Net profit can be improved by looking carefully at your gross and net margins.
Try these tactics:
- review all of your main suppliers and determine if you can swap any out for lower cost providers. Double check that any new supplier can match the quality and service you expect. Re-tender or ask suppliers to re-quote on a regular basis
- see if you have any components or parts of your business that can be sub-contracted out to cheaper suppliers. Check that this tactic won’t impact on what your customers expect (for example locally made versus imported). But if the component is a small part of what you provide, customers may not notice or mind
- identify your top five overhead costs to find savings. Overheads such as power, insurance, office supplies, internet, subscriptions and communications often reduce in price year by year. Make sure you’re getting these reductions
- trim employee costs if possible. Review job descriptions to find any overlap – you may be able to get by with fewer people on the payroll.
Strategy Four; Manage the cash crunch
There are many reasons why small businesses experience sudden cash flow crunches.
Identify the reason for your cash crisis and move quickly to solve the problem:
- External factors have caused a sudden drop in demand
At times there will be things that happen locally or globally that impact on what customers buy which you have no control over. Pandemics, earthquakes, floods, new inventions, changes in legislation can all impact your sales. Develop a contingency plan on what to do before disaster strikes. - A major customer hasn’t paid on time.
Implement stricter credit control and better debt collection procedures. Contact customers to ensure you have the right purchase order and the invoice has been sent to the right person. Check if your contact has gone on vacation and forgotten to process your invoice (it does happen). - A rise in the cost of production has eroded your profit margin.
Try and source less expensive materials or supplies or decide if you need to raise your price. Monitor your gross profit margin on a more regular basis for any further profit slippage. - Your business overhead has increased.
Identify specific expenses and see how you can reduce them. Check your net profit margins to spot any out-of-proportion overhead increases so you can take action. - Your business is growing quickly.
You don’t have the capacity to fund the growth with your working capital. There’s usually a time gap between selling goods or services and getting paid by customers. Meanwhile there are bills to pay. See if you need to slow down: don’t accept every new job or order that comes in, select only the most profitable and those that pay on time. - Sales have been slower than predicted.
Review your marketing plan and sales campaigns. Alternatively, if you can’t see any future improvement in sales, make sure your business is still viable by going back to your original feasibility plan to see what went wrong.
There may be other causes such as the loss of a major contract or you bought a large asset at the wrong time and you now need that cash reserve for working capital. In each case, understand the cause and the action you’re taking to avoid repeating the crisis, such as diversifying your customer base or using your cash flow forecasts to time purchases more appropriately.
If you do find yourself in a cash crisis, there are a number of funding options to consider, ranging from self-financing and bank loans to finding a business partner. The relative attractiveness of each option will depend on the size of your cash flow shortfall and how long you’re likely to need the cash.
Find internal funds
Before you look for external sources of funding, see if you can free up cash from within your business, for example:
- offer customers a discount for early payment or ask them to pay up front
- ask customers to pay by credit card now rather than invoice for payment later
- hold a sale of surplus or slow-moving stock to raise cash
- ask suppliers to take back excess stock and give you a credit or longer payment terms
- sell under-used assets and rent the equipment only when you need it
- downgrade or sell vehicles to raise capital and lease them back with monthly payments
- reduce your drawings from the business until revenues improve.
Your accountant and advisors may be able to suggest other ways to release the locked-up cash in your business.
Apply for a bank loan
If you need a business loan and have a good credit history, consider a higher line of credit or access to a business loan. If you’re going to need a significant amount of money, you’ll likely have to present a detailed business plan and financial forecast.
Take on investors
A business partner might be a source of capital. There are advantages but also pitfalls to taking on a business partner, so get expert advice first from your accountant and your lawyer; they may also know suitable investors. Be aware that you’ll need to share the ownership of your business if you go down this path.
Ask family and friends
You could ask family, friends or business colleagues to help out with a temporary or long-term loan. It’s best to put the agreement in writing and get everyone to sign it, so that both sides are clear on an agreement. Be aware that this sort of agreement could strain personal or working relationships if things go wrong, so treat it as a last option.