In 2021, everyone—business owners and household budget holders alike—are considering all the ways the coronavirus pandemic has impacted or will impact their financial health. Don’t get stuck in a loop of worry and helplessness. Action is often the best way to combat these feelings.
Just like the budget for a household, the financial health of a business benefits from having a strong safety net in place. Building a safety net for a business follows the same basic principles as for a personal financial safety net, but with a few adjustments.
An emergency fund is just as critical to the financial health of your business as that of your personal budget. When the expected or unexpected expense happens, how will you pay for it?
Recommendations for a business emergency account mirror that of a personal emergency savings account: have three- to six-months of expenses saved for when (not if) hard times hit. Although that can seem daunting, business owners should attempt to save every possible extra dollar to cover fixed expenses for at least six months. Of course, the amount of cash flow necessary for an emergency also depends on the type and size of your business and how many people you employ (ex: a manufacturing facility will require a larger emergency fund than an independent writer or graphic designer).
Year-over-year business owners should strive to increase the company balance sheet by investing a portion of the company profits back into the business. A healthy balance sheet helps you in good times as well as bad times.
Business equity is the difference between your assets (or your business resources) vs. its liabilities (or what debts the business carries). Building business equity can help you sustain through difficult times and ride high during the good times.
How do you measure your company’s success? Increased revenue is just the first step of success. Most small business owners manage to the gross revenue line, meaning they feel if their revenue is increasing then the company is doing well. However, if profits from the goods or services you sell don’t outweigh your expenses, your business won’t be around for the long haul. A steady, controlled growth, making sure you are managing your profit margins and controlling your costs, is usually the best recipe for long-term success.
But what if your business already runs at or near max capacity? Reinvesting revenue back into your company with upgraded equipment or enhanced processes can add to the value of your business, and thus, increase its overall equity. Lowering costs through process enhancements and strategically managing debt and capital will also show an improvement in the balance sheet of the business.
Once you have more equity in your business, you will have more avenues in which you can use it. Businesses that have strong balance sheets are able to obtain financing for both short-term and long-term needs. A credit line will help your business with working capital covering the day-to-day expenses while you try to collect your accounts receivable. If your business has capital expenditure needs, a healthy balance sheet helps with obtaining financing for new equipment or service vehicles. The thought is: grow the business, watch expenses, and build your balance sheet. In turn, your business will be a stronger and healthier company to weather downturns in the economy. By building equity in your business, you will help create your financial safety net.
During turbulent times, it’s important for a business to stabilize its customer base. This isn’t taking regular customers for granted, but rather ensuring your current clients are consistently happy with your business and relationship.
While it may feel counter-intuitive at first, focusing on a few anchor clients and solidifying those contracts creates a predictable baseline income. Nurturing and strengthening those relationships creates a consistent cash flow for the business. If it is possible in your industry, work toward adding recurring revenue streams with your clients. Without having to focus on going out to gain new clientele, this allows you to work smarter, not harder, to maintain consistent revenue streams. This will free up time to expand and diversify revenue streams down the line. Remember, if you lose one customer, it takes TWO new customers to replace and grow your business.
Having a detailed plan in place for when internal or external factors negatively affect your business, can save you a lot of time, panic, and thus, money. Sometimes you can see problems coming a mile away and other times you’re blindsided—have multiple plans for multiple emergencies. Your plans should include how you want your business and employees to proceed with efficiency and safety so cash or resources are not wasted. A well thought out, detailed plan will be a strong asset when you need it, and will certainly help your long-term financial health in the event of an emergency (and currently, we all know the feeling).
A financial safety net for a business isn’t woven overnight, but in the long run, it will protect the survival of a business during an economic downturn or other global crises. Need help getting started with a plan to weave your safety net? Connect with an experienced commercial relationship manager or local community banking office to begin weaving your net with Standard Bank’s team today!