With so much focus on the Covid pandemic and recovery, it can be a surprise to remember that ordinary business conditions aren’t stable either. We keep hearing stories of companies hit by impact to revenue, and while some is Covid related, a lot is also just general business. One of the biggest red flags for a company can be declining revenue.
A business might be growing at breakneck speed, hit a hurdle and then all of a sudden the pace drops off. Believe it or not, this kind of calamity can actually be cash flow positive. It gives time for the business to step back, clear the pipeline and focus on bringing money in again. This is why being prepared is essential so you have time to adjust your marketing spend or start cost cutting measures before your business is too badly impacted.
Not the seasons
Remember, although it is similar, this isn’t an article on seasonality (read this instead: t’is the season so is your business prepared?) which is a regular and reoccurring changes to the flow of business.
For example, many consulting businesses take a dip in revenue over the quieter months of December and January. That’s nothing to do with their business model and shouldn’t impact them (unless they haven’t prepared for it).
So how do you prepare? Follow your forecasting
A financial model will allow you to scenario plan and have an understanding of impact on your business for changing circumstances. Managing a revenue hit will be far easier if you’ve already considered what will happen. Financial models are our bread and butter, and we’ve repeatedly seen the power of these in coping with adverse situations.
Know your legal obligations
One of the first things that catch businesses unprepared can be a big tax bill or other legal obligations. This means understanding when you’ll be due to pay GST, PAYG and any other obligations. If your working capital is investing in growth, you’ll also need to ensure you have reserves to pay these obligations when they are due. Read our piece on this here: Three critical things SMEs need to be aware of in August
Factor in one-off costs
In any forecasting, the potential for big one-off costs need to be considered as these can have material impact to the cash reserves of a business. Was this an expense caused by expansion, or doing something different or is it a larger than expected bill?
Overcoming the cash hurdle
If your business has been hit, the first thing to do will be review the circumstances.
The main things to understand to assess how to approach your problems are:
- Is it one off?
- Is it structural?
- Is it ongoing for months or years?
- If it’s just temporary, how do you access capital for the short term?
- If it is ongoing, what are the options?
- To handle a short-term dip in revenue, you have many options. Firstly, you will need to assess from a strategic point what your options are and what the road to recovery looks like.
That could be increasing reassessing and increasing marketing spend, or looking at other costs including staff.
If it’s temporary, look at funding fixes
Once your overall business goals are understood, if your business is performing well and is profitable you can look for financing option. The main thing to realise is that you do not have to sit in despair. There are so many options for funding, and if it is a one-off, the options for funding increase exponentially especially if the company is profitable. If it is not profitable, a business owner can look at Research and Development grant loans, or even VC funding.
Speak to your accountant for options that might suit your business best.
If it’s a structural issue, have hard conversations
If the revenue hit is not just a temporary blip, but is showing a fall in demand for your product or services, or highlighting a problem within your company, you’ll need to take a different approach.
This could be pivoting your business, focusing on improving overall business processes or even considering closure if the problem is bad enough.
The best thing to remember is that the earlier you do this, the better it will be. Ignoring structural business issues could lead you further down the path of financial instability.