Home > Updates > What is your Plan B?
Most businesses we deal with are targeting growth in turnover. The cost of inputs and overheads are increasing, and unless costs are passed on through price increases, and/or the business has increased sales volumes, the bottom line will go backwards.
But what happens if the top line goes down rather than up? Many New Zealand businesses experienced this short term with the Covid lockdowns of 2020 and 2021, but the financial impact of these reductions was greatly softened through the wage subsidies received. What happens if a future drop in turnover is not coupled with government support?
We have been encouraging business owners and managers to take a close look at their operations and make sure they have a very solid understanding of the financials. What is the current break-even point, from both a profitability and cashflow point of view? How far can turnover drop, and for how long, before it causes a significant cashflow problem? If you know that a cashflow problem is looming in three months’ time, you have options available. If you find out on Monday that you can’t pay the wages on Wednesday, you are in trouble.
We have been encouraging a closer look at the financial data so that true breakeven points are understood. Further, current trading results are monitored, sometimes as often as daily, so that business owners know how things are tracking in real time. Thresholds are agreed upon, and if these are not met, they trigger a series of pre-planned actions. Plan B is in place, and in the bottom draw, so that if things don’t go according to Plan A, you aren’t scrambling to decide what to do, you simply implement the strategy that has previously been prepared. When things go bad, they can go bad fast, and action has to be taken quickly.
When the gross margin (sales less the direct costs of achieving those sales) is not sufficient to cover the fixed business overheads, a business is obviously making a loss. This may not be an issue for a month or two, or if seasonality dictates that some months will be profitable and others not, but continuous months of losses can’t be left unaddressed – action must be taken. If the cost of direct inputs includes labour (for example, manufacturing), then at what point do we need to reduce the workforce? Assuming all possible action has already been taken in terms of increasing prices and volumes and/or reducing the costs of inputs, then the only area left is overhead costs.
A solid review of these costs needs to be conducted, and a plan put in place to determine what costs will be cut, and in what order. These are difficult, often painful, decisions to make, and that is why they need to be made in advance, not when the business is already at a critical point. What redundancies could be made in the event of a crisis, and what is the legal process? Let’s understand that now, in case it is needed, not at a time when you have only days to implement changes. What assets can be disposed of without directly impacting turnover? What ‘nice to have’ costs can be axed at short notice?
As business owners or company directors, we need to plan for more than one outcome, particularly in this uncertain environment. We are obviously always hoping for the best-case scenario, and implementing strategy designed to ensure the continued success and growth of the operation, but at the same time we have an obligation to consider alternative, less favourable scenarios.
As Winston Churchill said, “he who fails to plan is planning to fail.”
If you need help identifying your Plan B, please get in touch with your Nexia advisor.