The effects of the coronavirus on your business is likely all you’ve been able to think about over the last few weeks. Your sales have plunged, or worse, your business is now closed during the shutdown. It’s a full-blown crisis, fueled by a pandemic, with macroeconomic indicators. What are you supposed to do?
Now more than ever, the answer is business planning, which right now, you might call it your emergency plan, contingency plan, disaster plan, or whatever.
If you’re looking for a place to start, I suggest focusing on effectively managing your cash flow. From there, you’ll need to take a step back and look at the big picture of what makes up your business plan. It may feel somewhat strange to start or revisit this process in the middle of a crisis, but it’s the best way to assure you’re making smart decisions that get you through uncertainty while allowing you to thrive once things settle down.
A working business plan connects the dots
Change within or around your business doesn’t void the need for planning, in fact, change is when you need business planning the most. Specifically, if you have an ongoing sales forecast, and expense budgets linked to that forecast, then you have instant visibility for making quick adjustments to sudden change.
Having good projections connects the dots between sales, costs, and expenses to provide you with a holistic picture of your financials. For example, this simple line chart comes from an existing business plan and illustrates the reality of a business in a state of crisis.
It shows how the actual sales (in blue) were above the forecast (in green) until the sudden drop when the crisis hit. And from there, a revised sales forecast (in red) displays the adjustments made under these new circumstances.
What your sales numbers look like in a crisis
If you’d like to see the actual numbers, from the graph above, here’s the harsh reality of what planning looks like in a crisis. Sales plummet and your numbers now look like this:
Even though your sales plan that you budgeted for this year looked like this:
So once you’ve gotten past the shell shock of those drastic changes, you need to revise your projected sales for the next few months:
… and that gives you, in about 2 minutes, your view of the crisis impact and how it affects you (all of which is represented in that one line chart above … generated from these numbers).
These are just highlights. It takes a whole plan.
These illustrations are just highlights to give you a realistic view of the situation and kickstart your adjustments. You’ll need to dive into the core financial spreadsheets, that make up your whole business plan, which you can find examples of at the end of this post. Of course, the ideal situation is that you already have a plan in place, that you are actively reviewing and refreshing.
If you don’t, now is the perfect time to set up a business plan and forecast. While this may seem daunting, you don’t need a full formal business plan at this point. Instead, start with the quick and easy lean business plan, to help you map out your business and financing activities over the next few months. However, if even that feels unattainable at this time, at the very least, you need to do some financial forecasting.
To help get you started, we have a number of easily accessible resources, templates, and articles available across Bplans.
For a full list check out the business plan guide and scroll down to the specifics about financials including:
- Key elements of a financial plan
- How to do a sales forecast
- How to build a profit and loss
- How to forecast cash flow
- Building your balance sheet
- The difference between cash and profits.
Also, for your crisis plan, be sure that you know your burn rate and runway, which is how quickly you are using up your cash reserves and how long you have before you run out of cash.
Additionally, we have a curated list of COVID-19 resources to help you manage your business activities, apply for loans and understand cash flow problems during this crisis.
Make crisis adjustments to your business plan
You don’t need this article to tell you that you need to cut expenses. You knew that already, and if you want to jump ahead to our case-study solution below, click here. However, if you’ve already made some steps toward cutting costs and are unsure of what else you can do, here are some tips:
Consider carefully before cutting payroll
Our business got through the 2008-2009 great recession without letting a single person go. Our CEO Sabrina Parsons watched the plan and plan vs. actual indicators very closely and cut other expenses first, rather than people. She pointed out that it is expensive and short-sighted to lose people who are trained, experienced, and loyal; especially when you will have to go through all the expense of rehiring and training again in a few months, assuming things get better.
Furthermore, as I write this, federal and local governments are developing safety nets and incentives that will reward businesses that don’t let go of employees. Currently, the best options are the Economic Injury Disaster Loans and Payroll Protection Loans, which are both great opportunities to maintain costs and extend your cash runway.
Before you look at letting people go, look carefully at benefits tied to payroll, as some are easier to cut than others. Obviously, you don’t want to cut into health care, but you might have some learning, career development or retirement-related programs that you can reduce without hurting your people in the long-run.
Some options to consider when you need to reduce payroll
And, if worse comes to worst, you still have options to look at before letting people go:
- Freeze hiring: It may cause a bit of pain but it helps assure that you can maintain your current staff.
- Cut leadership salaries: Your leadership team, your key managers, are usually closer to the business, more in tune with the underlying values, and in a better position to understand the need than the regular rank and files. Frankly, it’s easier for a higher salary to weather a temporary cut than for the lower salaries, who are living closer to the edge.
- Cut all salaries by 20%: Share the pain equally. This is a crisis and most people can understand the need. Particularly when a measure like this saves people from layoffs and preserves jobs that will be waiting for them after the crisis is over.
- Layoffs: In the real world, this, unfortunately, has to happen sometimes. Please make sure you are laying people off to preserve business survival, not profits. Our business plan, revised for the crisis, does not include profits. We are simply trying to minimize the loss and maintain the livelihoods of our employees.
Some expenses are tied to sales and will cut themselves
In many businesses, some expenses, known as “non-discretionary” expenses, will automatically drop as sales drop. For example, businesses that sell physical products through stores often have mandatory co-promotion expenses linked to sales that stores charge. Limo and transport businesses save on gas when they don’t have as many trips. Maybe that’s a factor in your business too, look for that and account for it.
Review general marketing expenses
Use common sense and trust your instincts, as even in a severe downturn, some marketing, for most businesses, can continue. You can even look to pivot your marketing strategy around the crisis, finding new target markets or use-cases for your business to promote. But not all marketing is equal, some programs are more useful than others, and some programs will be easy to cut and live without until the crisis ends.
Our sample crisis business plan
To help illustrate the crisis plan, I’ve included the business plan spreadsheets from our sample case and would like to point out some specifics to keep in mind.
Key points
- The revised crisis plan doesn’t turn the company profitable during the course of the crisis. It instead, minimizes the loss using smart cuts. If the crisis continues longer than a few months, that will take more plan revisions and more long-term measures.
- Nobody loses their job in the short-term, according to this plan. We keep the people because it will cost money to hire them back, or replace them, later on.
Detailed financial forecasting spreadsheet
For those who are curious, these are the spreadsheets and data used for the illustrations above (and I can’t resist adding it would have been a lot easier in LivePlan, but I want to keep this information broad and not product-specific.) Here is the original plan as it existed before the crisis:
And this one shows the immediate view with declined sales:
And finally, the immediately adjusted plan. Not that there isn’t a lot more to do, but this one manages to cut the losses without cutting payroll, by eliminating discretionary expenses and reducing marketing expenses. It doesn’t insist on staying profitable and instead minimizes the short-term loss.
You’re not out of the woods yet, but by starting with these adjustments, and keeping in mind the need to manage your cash flow, you’ll give yourself time to adjust and a starting point for more thorough planning.
Tim Berry is the founder and chairman of Palo Alto Software and Bplans.com. Follow him on Twitter @Timberry.
