RHRT – Radical Honesty and Radical Transparency …
As the first step, find out if you are eligible for any government assistance. See COVID-19: Information for businesses.
Apply for whatever you believe you are eligible for immediately. The sooner you apply, and assuming you and or your business qualify, the sooner the support will be delivered. Do this now. Don’t be shy. The point of the assistance is to keep, as far as is practical, people spending. If people keep spending, then the money-go-around that is the economy will keep spinning. The economy will not be like it was a month ago, but a hobbled economy is far better than one that has completely collapsed.
Now, let’s get down to business.
Business is all about creating value in the form of products, services, and experiences (what we call solutions) and selling those solutions for more than it cost to produce them. The reason it is crucial to remember this fact is that you can safely assume that people will not buy your solutions because they feel sorry for you, even if the altruism is of value to them. No, if people are not buying your solutions, it’s because it is not as valuable to them as is keeping their money in their pocket, or buying someone else’s solution. Even if your solution is valuable, there may not be enough customers remaining with money to buy it. Forget yesterday, what is valuable NOW, and who is available NOW and willing to buy your solution NOW? If you need a Business Model refresher, please see The 1-page Business Model.
Regardless of the economy, people only buy what is valuable to them.
Here’s a formula that you will be familiar with:
Revenue = (Cost of making solutions + profit) x number of units sold
In any economic reality, you may be able to influence the variables, but you have limited if any control over the variables. One of the variables which you have some control over is costs, and we will get to those shortly.
We wrote a complimentary eBook last year called Cash Flow Forecasts and Statements – A Brief Explanation. Feel free to download a copy to help you with the following.
The number of units sold will depend on:
- The value of the solution.
- Did anyone ever need your solution?
- Does anyone still need your solution?
- Do those people who need your solution still have money to pay for it?
- Are then enough people remaining that need your solution and still have money to pay for it?
- Can you get your solution to those who have bought it?
- Can you service your solution?
If you make running shoes, maybe people won’t need them when they are self-isolating and prioritising their remaining cash on buying food.
The Cost of making solutions include:
- Utilities such as water, power, gas, waste management
- Licences, especially monthly fees
For a complete list, download this NZTE Cash Flow Forecast template.
Go through your bank records and find and inspect all outgoings. Which are Necessary, such as rent? Which are avoidable, such as the fruit bowl. Which are, under the new circumstances frivolous, such as scented oils in the toilet. Make a clear distinction between desires and needs – you may desire scented oils in the toilet, BUT you NEED air! I acknowledge that some items such as flowers in reception and fruit bowls for staff are motivational and tokens of appreciation. BUT priorities have changed – get used to it! If we can do it, then we need to be grateful that we are able to keep our business’s doors open and employees employed, that is motivation enough. Whether the loo smells nice is not a priority anymore, and it won’t be for a while.
Which costs are necessary but negotiable? Don’t make any assumptions. For example, your landlord will prefer to receive your rent in full and on time, but with every business likely in trouble, maybe he or she would prefer some rent as opposed to none if you go broke. Call your suppliers up. Communicate. Discuss options and solutions.
- Under the circumstances, profit may not be achievable at all or at the level you prefer.
- Profit is a necessity – without profit, you will go broke.
- Aiming for break-even is not an option as it doesn’t take much to slip below break-even with a few defaulting customers.
- You need to achieve break-even + profit. The target profit needs to take into consideration what the new market conditions can sustain as well as the likely default-rate of your customers.
- Avoid receivables by insisting on payment in advance, not on delivery or 1-month in arrears. Amazon takes payments in advance – it’s not a new concept.
- Breaking even is the least you need to achieve.
Now is the time for triage. In creating your new Business Model liferaft, what do you need to take on board? Be realistic – non-essentials such as scented oils will be ballast that may help to sink you.
Steve Blank in his post The Virus Survival Strategy For Your Startup, talks about several things that you ought to do in priority order:
- Look after yourself and your family.
- Look after your employees and customers.
- Look after your business.
Number (1) is self-evident. Look after yourself so that you are able to look after your family. Think – “put your own oxygen mask on first.”
Number (2) is also self-evident. Your employees and customers will need help too, and when this is over, you will need good employees and grateful customers to return. Be a caring and compassionate person. Don’t destroy your credibility in a moment of greed or panic. If you can reduce your income to help your employees, do it. Negotiate mutually acceptable terms with your customers without going broke. If you go broke, you won’t be able to help anyone.
Regarding number (3) your business, you need to know:
- Your costs
- Revenue, Gross Burn Rate, Net Burn Rate, and Runway.
Now you should know all these to a reasonable accuracy already, but regardless, *stuff* just got real. You need to know all of these accurately right now.
Revenue = the actual (not forecast), sales per month
Gross Burn Rate = the amount of cash (your costs) you are spending per month
Net Burn Rate = Revenue – Gross Burn Rate
- If Net Burn Rate is negative, this is the amount of money you are losing or ‘burning’ each month. You are spending more than you are earning and you will eventually run out of money.
- If Net Burn Rate is positive, congratulations you are earning more than you are spending, but there is no room for complacency.
Runway = Money in the bank ÷ Net Burn Rate
- This is the number of months your business will survive until you have no money left.
- You need to review your costs, all of them. You need to avoid running out of money.
- Consider topping up your cash reserves with increased loans from your bank. Yes it will be expensive, but running out of money is not an option.
- You need to be on top of receivables (the money owed to you) in any economic environment. If your receivables are not under control, then the revenue measurement (assumption/dependency) above becomes invalid and negates the whole exercise and you are driving blind.
- With widespread self-isolation, receivables are likely to become a major problem for many businesses. You may need to move to a cash-in-advance or cash-on-delivery model, like with most internet purchases.
New Economic Environment
Governments around the world are moving to social-distancing and self-isolation, effectively trading the economy for people’s lives. It’s a great trade, and it’s far better to do so and have a non-event months from now, much like Y2K was largely a non-event, but only because of the preparations taken beforehand to mitigate both the risks and effects.
But these measures have invalidated many Business Model dependencies. How is your Business Model coping with social isolation and people working from home or being fired or your suppliers not able to open?
Communicate well and frequently with those you depend on and who depend on you. Choose your information sources wisely, such as Unite Against Covid-19.
Going back to the need to be fulfilling a Job To Be Done, that is, see a need, fill the need, does anyone need your solution anymore? What are the new Jobs To Be Done? Can you pivot your solution or redesign it completely to suit any new jobs in this new economy?
In the end, it is possible, even likely that you cannot do anything to keep your business going. As devastating as this will be to accept, denial is not going to help you. If this is your reality, we feel for you. Take a few moments and do whatever grieving you need; this is natural, normal, and expected. Now, swallow your pride and approach Work and Income and COVID-19: Information for businesses, they are there to help at times like this.
If you have any questions or concerns, please make contact, we’ll try to help.