First of three parts
Part 2: Top 5 balance sheet assets small businesses can turn into cash
Part 3: Small business survival: Revenue projections and cost-cutting
As COVID-19 coronavirus cases continue to increase, we’re seeing the impact: stock market volatility, school closures, people staying home. Restaurants, bars, movie theatres and other businesses are temporarily closing. It’s no surprise that countries like Norway and China are reporting rising unemployment rates. COVID-19 has already started to put the U.S. into the beginning of an economic downturn.
In any economic downturn, people fear a coming recession. Small business owners especially fear for their company’s very survival.
Owners ask themselves, “How long can my business ride out the storm of a sales downturn? How do I know if my business is trending toward failure? Are there other factors that will cause my business to fail?”
In part I of this three-part series on surviving an economic downturn, we’re going to set the stage with the five factors that most impact financial results. Here’s what you can do:
1. Recognize cost increases
Some changes to the marketplace are rapid and are more easily noted (as in the case with COVID-19’s impact). Others are gradual, and you may not notice how they are affecting your business operations. Surviving during an economic downturn means catching and accounting for both types of changes, as you can then solve for both types.
For gradual changes, performing a trend analysis identifies changes over a period of time and catches the subsequent erosion in profitability.
Another useful tool is common sized financial statements. These are presented as percentages to concentrate on underlying trends by abstracting from changes in the dollar figures caused by growth or decline.
2. Understand where or how your business earns profit
A company that sells various products to various customers at various prices must understand where their profits or losses are coming from.
Do you make price concessions with high-volume products and/or large customers? Without careful analysis of profitability by product and customer, you may find these concessions are slowly eroding profitability.
Your business may also accidentally neglect a lower-volume/higher-profit product or customer and even make a decision to discontinue the line or customer. View your monthly performance in detail to unmask unprofitable product lines or customers that may be absorbed into the successful ones.
3. Adjust for errors or omissions on the balance sheet
Inventory that is overvalued from obsolescence, shrinkage or valuation errors will overstate the company’s profits. Inventory held for greater than six months without an existing market for resale can result in unanticipated write-offs in later years.
The same is true for uncollectible accounts receivables. Adjustments to overstated assets result in expenses to the profit and loss statement. Erroneous figures on the balance sheet will impact the true current profit and loss results. Without a valid and substantiated balance sheet, your company could face losses to its profitability in future periods.
4. Manage cash
Most businesses’ main purpose is to turn their products and services into cash. Yet they often fail to manage this important resource. The key is how and where you use cash and then measure the return.
Spending cash on long-term, slow-yield items will hinder growth and the ability to meet obligations. View your assets with an eye toward how they can generate cash. How quickly you turn your products or services to cash will increase your performance. One area of improvement can come from a further tightening of your credit policy.
Read more: How to manage your business’s cash flow
5. React quickly to shrinking profit margins
Small businesses face pricing pressures from customers, as well as increasing domestic and foreign competition. While costs for materials and labor rise, demands for lower sell prices drive revenues down. Price erosion is impacting your profit margins, and it may seem like there’s nothing you can do about it.
Your option is to improve your operating processes. Gaining efficiency is critical to fighting profit erosion. Small businesses must search for ways to lower overhead and product costs through increasing efficiency and productivity.
How to survive a recession or downturn
In part 2 of this series on surviving an economic downturn as a small business, we discuss the importance of financial statements and how to turn non-cash assets into cash. Click here to read part 2