From pandemics to national disasters, recessions, and inflation, business cycles are a reality. No one has a crystal ball, but even if you can’t predict the future, being prepared to respond to disruptions is better than being forced to react to them when they’re already underway. What can you do to make your business more resilient, whatever may come?
Cutting costs and layoffs may be the first course of action that comes to mind when you’re noticing a change in the market. These kinds of cuts can seem like an immediate fix, but they can also cripple your business when the market changes and you’re ready to grow but lack the people and resources to ramp up. That’s why it’s so important to take a fresh, strategic look at the state of your company’s finances before you feel like it’s an emergency, and decide what can be prepared to do to help your business survive a downturn and flourish in a recovery.
Before you jump into action, you need to get a clear picture of where your finances currently stand. Think carefully about which indicators will give you the most insight into your financial health, and then examine them carefully.
Revenue and profit will give you the best window into the state of your finances. So start by looking at your profit and loss reports from the first two quarters to see what revenues, costs and expenses you’ve incurred. What’s changed now that you’re midway through the third quarter?
Now look at your cash flow statement. How are your receivables performing? Have you seen any slowdowns or an increase in the number of overdue receivables? What about payables—are you able to pay on a schedule you’re comfortable with, or do you often find yourself inching closer and closer to due dates?
You have to strategically decide which indicators you want to use to tell you when it’s time to make decisions in your financial planning that will keep your business healthy in a changing environment. So once you have clarity on exactly where you can make adjustments, the next step is finding solutions—figuring out how to stop the bleeding, and how to start bringing in more money. Here are three things you can try.
Planning ahead starts with a clear picture of where your finances currently stand. Revenue and profit will give you the best snapshot of the state of your finances. So start by looking at profit and loss statements from your previous two quarters to evaluate and compare your revenues, costs and expenses. What’s changed from then to now? What patterns do you see, and what’s causing them?
Now look at your cash flow plan. How are your receivables performing? Do you have cash on hand to cover your payables on or before they’re due? Do you have a cash cushion, and do you know how much cash you should have readily accessible in case you need it to keep running? Strive for consistency and predictability now so you can easily see it and take action when cash starts to slow down. Revenue, profit and cash flow are three key financial indicators you should regularly watch. You’ll learn what’s normal for your business, and you’ll be prepared to notice when things are slipping off normal. It’s an early warning system that can help you make decisions to keep your business healthy in a changing environment.
Now that you have better clarity on these three indicators, you can start to think about how to respond to tighter market conditions when they come. Here are three suggestions to get your thinking started.
Ask yourself what costs you can cut that won’t harm your ability to keep producing your product or service exactly as promised, always on time. Your customers will be more discerning when money is tighter, so keeping these promises is crucial in a tight market.
Performing triage on your finances by cutting jobs may seem like an obvious and impactful choice in an emergency. And, there may be projects or programs you need to set aside during a downturn so you can focus your resources on keeping production steady. But laying off people who are selling, producing and delivering your product or service isn’t always the right move. Can you cut payroll and still retain the capacity you need to do business? Will payroll cuts actually make it harder for you to meet your commitments to your customers? You may not want to risk it in a highly competitive market. And, if you do cut jobs, you might find it harder to staff up again so you can recover quickly and grow when market conditions change. So consider layoffs carefully and strategically before you act.
Raising prices can be stressful. Many business owners avoid doing it because they feel uncertain their customers will tolerate the increase. Take an objective look at the prices you charge compared with the cost of doing business. Decide now if you’re charging the right prices, making the kind of profit you want and need to make, and staying competitive. The best time to raise prices may be when you don’t feel forced to it. Don’t let assumptions keep you from deciding to do what needs to be done. If you approach price increases strategically and transparently, you’re likely to have a much better outcome than you’d imagined.
One way to help ensure a price increase won’t drive your business away is to test it. Increase prices for a subset of your customers or for shoppers buying your product on a certain channel. Then analyze the effect of the increase on sales. Did you lose 5% of the customers in the test group? That’s a good indicator that the increase will be tolerated by most customers. If you lose more customers in your test group than you can comfortably tolerate, you can rethink your approach.
You can also ease customers into a new pricing model by offering a promotional period. Inform them that prices will be going up on a certain date,, but they can still get your product for the same price until then. They’ll know what to expect, and they may even be motivated to stock up, spending more money now while they can still save.
The longer you’re in business, the more likely you’ll need to increase your prices as your own costs go up. But raising prices isn’t a substitute for growing your business. Bringing in more customers or adding new products or services that people want are longer-term strategies for true growth. A price increase could help you keep the lights on, but if you want your business to thrive, the most important thing you can do is to find ways to grow.
Don’t be afraid to get creative—see if you can generate some growth ideas that will serve your business well into the future.
Think flexibly about the costs associated with delivering your product or service. Could you change up your packaging, or adjust your product or service in a way that allows you to produce it sustainably while maintaining consistent prices for your customers? You may be able to find ways to automate certain parts of production, allowing you to increase output without increasing costs, or create a lower-price-point version of your product or service to appeal to a different market.
Innovation means something different for every company, so open your mind to every aspect of your business model. And whatever you do, keep your customers’ satisfaction and trust in mind. Don’t bait and switch them with a lower-quality product. Don’t spring changes on them without communicating.
External stressors like a natural disaster or an economic downturn can show you the weak points in your business. So, don’t just get through the hard times; seek every opportunity to make strategic changes that will keep your doors open for years to come. What sustainable changes can you make today that will help you plan to respond to changing conditions instead of just reacting? When you’re ready to assess your finances, download our free Guide to Strengthening Your Financial System. And if you need more support, reach out to us for help.