Until 2 days ago, my plan for this weeks’ newsletter content was an article about 4 paths to grow profitability in a small business.
That was the plan and then I had a meeting with a customer who just lost 30% of their revenue due to customers canceling their service over economic concerns. Over the course of about 75 minutes the tone of this business owner went from:
‘Holy crap, this isn’t good, what do we do, I should stop paying myself’ to…
‘OK, I understand the path through this and what we need to monitor closely moving forward.’ We went from panic to cautious confidence.
Stories like this need to be told to help other small business owners know the power in understanding the numbers that steer their business. So, here we go.
Now, don’t get me wrong, it’s not good. Losing 30% of your business in a 2-week period sucks (bad) but here’s why his business is going to be OK.
First, he has very strong gross profit margins consistently at or above 65%.
About 2 months ago we sent an article called ‘Worried about a recession or downturn? Gross profit can save you.’ Due to it’s popularity we just posted it as a permanent blog post here on the site – if you missed it, here’s the link. Well, here’s another real life example.
Additionally, he has a great team in place and thanks to his strong gross profit margins, we believe his team is safe from any layoffs.
This is great for him because he has a good team in place and turnover is expensive in both time and money. Plus, no small business owner ever wants to face the decision of layoffs. It’s gut-wrenching.
The second big reason this business will be OK is…
We are not focused on revenue – we are focused on profit and cash flow.
Here’s what we did during the meeting:
We conservatively adjusted the P&L forecast for Q3, taking into account the changes to revenue and cost of services, arriving at his new expected gross profit.
We reviewed 3 of those key profit drivers, payroll, marketing & overhead expenses and found a couple items which were low-hanging fruit to be cut. These likely needed to be cut anyways but this forced the process to review again. (I actually talked about this a few weeks ago too, check it out if you missed it.)
Next we reviewed the cash flow forecast based on the new P&L forecast. (We do this for his business). This business has some debt it’s paying down so at the new forecasted net profit numbers, debt is consuming too much cash for our comfort.
With a clear understanding of his cash flow picture we created a list of action items for him to take over the next week so we can make some decisions around potentially restructuring the debt to reduce the cash going out towards repayment. This will create some additional breathing room if necessary and if it’s not needed, the debt payments can continue as they are today, prior to any reduction in payments thanks to restructuring.
Finally, we modeled cash flow under current debt payments and a potential restructuring and now understand our best and worst case scenario for cash.
Again, this all starts with having a solid understanding of the numbers which steer your business.
While those are the two main reasons we believe his business will weather this storm, all of the above is possible because he understands the numbers which drive his business. We started the meeting with this business owner being confused and concerned (rightfully so!) and ended up being confident and armed with a plan of action – this is how you take control of your business rather than operate out of reaction and fear.
If you’re tired of going at this alone and need help, reach out. Click here to setup a short call to chat.