A blog reader reached out last week, suggesting I offer up some advice to small business owners.
She pointed out the print books I’ve written (like “QuickBooks for Dummies”) and then the downloadable do-it-yourself incorporation kits we sell encouraged tons of people to start a small business.
Her feeling? Now seemed like a good time to offer encouragement. And better yet, some actionable ideas for getting through this global storm.
Fair enough. And here are my thoughts.
Remember You Planned For This (Maybe)
A first thought. This stock market meltdown and economic slowdown? You may have already prepared for this. And you should take deep comfort if that’s the case.
No, no, I get no one can completely prepare for something like this. But ask yourself the following questions:
Had you worked to strengthen your small business’s balance sheet? Reduce your debts?
Had you tried to stash away a meaningfully large rainy day fund?
In retirement plans, did you diversify and hold bonds? Had you thought in terms of “safe withdrawal rates” for retirement.
What about the idea that you could use a “variable withdrawal rate” in retirement, meaning, sure, you’d like to live on “X” but you can make 90% of “X” work, too?
Do you have a trick up your sleeve to dial down your small business or household cash burn rate?
To the extent you or I can answer any of these questions “yes,” we’ve prepared.
If you thought through the preceding issues, hey, this won’t be pleasant. But your small business and family may get through this storm just fine. Or nearly so. Good job.
Learn Any Lessons from This Moment
A quick, related thought: If you or I didn’t prepare the way we should have? Okay, not so good. But we need to learn from the moment.
After this is all over? We will see more disruption. New crises will appear down the road. Next time, we can do an even better job of being prepared.
Create Business Plan for Worst Case Scenario
Now a comment directed specifically at your small business operation.
You want to update your business plan. And in particular, I suggest, you pay attention to two scenarios.
The first scenario to look at? The worst-case scenario. Look at what damage you’ve already suffered. Assume this all gets worst over the coming weeks and months. Figure out what you can do to limit the damage. See if you can and how you can slog through this rough patch.
If you haven’t been good about your business planning? Yeah, now’s the time to get going. Grab the historical financial information you have about your operation. (So your QuickBooks data. Or your Xero data.) Put that information into a spreadsheet. Start modeling what-if situations: you lose 20% or 40% of your revenue. A big customer fails. Collections slow down. Stuff like that.
Sidebar: Years ago, I wrote a book for MBA students learning Microsoft Excel. It included a bunch of business planning spreadsheets. You can visit our CPA firm’s website and download free spreadsheets from this book including a Profit Volume and Break-Even Analysis Starter workbook and a Business Planning Starter workbook.
A surprising reality? A firm typically generates cash as it shrinks in size. Accordingly, with some savvy planning, your challenges may not be as bad as you worry right now.
Remember: You don’t need to thrive over the coming weeks or months. You just need to get to the other side of this.
The one big sobering thing you need to identify? The point at which your firm fails. Know where that cliff is. Don’t drive over the cliff. Or to put this into more practical terms, don’t burn through all your savings trying to save or salvage the business. Don’t, for example, pay some vendor or landlord or yes even an employee money you need for a bankruptcy attorney.
Tip: Congress is “fire hosing” small businesses and individuals with cash, loans and other assistance. Make sure you know what other resources you have available as you think about your worst-case scenario options, including the new COVID-19 small business tax breaks, the COVID-19 employee retention credit, and new loan programs like the paycheck protection loans.
Create Business Plan for Best Case Scenario
The second scenario you must consider? The possibility that your business, contrary to what everyone might guess, actually ramps up. But you know this stuff happens too, right?
Some firms will experience a boom in demand as a result of the corona virus crisis. Obvious examples include healthcare providers, their suppliers and then the firms that provide them services.
And other firms, ironically, will see their opportunities expand. If you’re in this situation, plan.
The one big sobering thing you need to identify with a best case scenario? Surprisingly enough, the point at which your firm fails. No, I know, weird right? But if you experience explosive growth in your firm because of cataclysmic economic changes, you probably can’t grow your business without limit. You need therefore to know the limit.
A growing business consumes cash. Just to give an example, some firm that wants to make a tenfold increase in its production of face masks probably needs to “10X” its work force, its inventory, factory machinery, and working capital… and all weeks or months before customers pay for the face masks.
The general rule of thumb goes like this: You can’t sustain growth faster than you can grow your balance sheet. Make sure you know where the cliff is. And don’t drive over the cliff.
Use the Crisis as a Catalyst
I cringe when people say, “You don’t want to waste a crisis.” The idea is, in a crisis, you can make changes that in normal times you can’t.
But you know what? People say this because it’s true. And you and I need to look at taking those steps we know we should take but just never do because, well, you know. Too awkward. Bad timing. Stuff like that.
By the way? I don’t mean here you downsize your workforce. I mean, yes, maybe you need to do that. (Let’s exhaust the other options first, okay?)
But what I’m talking about is changing the way you or I operate. In some fundamental way.
An example: Some small “tax return centric” CPA firms talk about discontinuing the practice of having individuals come into the office for an appointment as the “first step” in preparing a tax return. These firms want to push clients and accountants to end what is, unquestionably, an inefficient extraordinarily expensive step. (The right way to get information to your accountant is digitally, using a portal.)
These firms should make this change. And probably others.
Sidebar: Are you old enough to remember when doctors made house calls? I barely am. But I remember fifty years ago riding with my dad, a pediatrician, as he visited the home of a family with a sick child. That might have been his last house call. I also remember people at the time complaining that, gosh darn it, you couldn’t find doctors who made house calls anymore. But that was a crazy way to practice medicine.
See therefore if you can end any of the crazy stuff you’re still doing. I’ll try to do the same.
Create a “Plan B” for Retirement
Were you close to retirement? Has this stock market meltdown torpedo-ed your retirement “Plan A”?
That sucks. But while a period of economic grief makes sense, let me throw out this idea: You can come up with a “Plan B” for retirement. And probably more easily than you might imagine.
You don’t need to do that this coming weekend. But over the next months or year, as the picture comes into focus, look at where things are. Think about whether your retirement “Plan A” still works. If it doesn’t, okay, figure out a “Plan B.”
By the way? Lots of people have historically had to figure out a “Plan B.” For what that’s worth.
Plan Beyond the Crisis
A final idea. I think you and I need to be planning for what our small businesses look like after this crisis.
No, no, I know right now we’re all thinking about the next few weeks. Of course. But we don’t want to get stuck in the moment.
You can probably plan for (and so rely on) the income and profitability you’ll earn after the crisis passes to get back on track financially. Maybe this income becomes part of the way you make your retirement “Plan B“ work. Or future profits repay the loans you use to get through this.
You may also be able to cut spending or sell assets after the crisis passes. Use the money to get back on track. Be alert to these sorts of future possibilities.
You don’t need to solve every problem or address every issue right now. Some questions you and I can wait to answer. (Er, obvious comment: Now does not seem like the right time to sell assets at bargain prices. So don’t liquidate assets today unless you can’t possibly avoid it.)
Some Other Small Business Corona Virus Resources
A while back, I blogged about applying former Treasury Secretary Timothy Geithner’s “stress test” concept to small businesses. What Geithner did for the banks in the Great Recession makes sense to think about for your small business: Stress Tests for Your Small Business.
We talked about reacting to and planning for a bear market here: Bear Market Survival Tactics: Ideas from David Swensen’s Book
Planning for an appropriately-sized rainy day fund gets tricky for small business owners. But here are some thoughts to help you work through this riddle: Small Business Rainy Day Funds.
We did a blog post series on why someone needs a “Plan B” for their retirement. It starts here: Retirement Plan B: Why You Need One. Other follow-up posts appear here and here and here.
If you’re close to retirement, you might also consider delaying your Social Security benefits as a way to extend your portfolio longevity. This blog post explains why this counter-intuitive approach works for many people: Delay Social Benefits to Bump Your Safe Spending Rate in retirement.