You can’t run a business without a plan. That means developing a realistic budget and a thorough understanding of current and future cash flow. But, how can you plan when it’s tough to predict just what demand for your product or service will be like, say, two or three months down the line? “In a volatile economy, it’s a lot harder to predict the future,” says Ken Gaebler, who runs Gaebler Ventures, a Chicago based-small business consulting firm and business incubator. But you can’t operate your business on hope.”
These four strategies might help with your budget and planning process:
Do your budgeting and planning more frequently than you might in a good economy. One approach is to create quarterly budgets, based on average sales over the past three months. That way, you can make adjustments each time depending on the previous quarter’s results. Another tack is to think through five or six scenarios for what could happen over the next one to three months and the results, as well as how to respond. (Example: A big contract will or won’t come through, a line of credit is denied or approved). Then, put together multiple budgets based on those scenarios, and write them for a shorter time period, say monthly. Gaebler also recommends spending at least four hours a week on budgeting and cash flow projections.
Developing more-detailed budgets is also important. Take William McNee, founder of 25-employee Saugatuck Technology in Westport, Ct. His budgets now include around 100 line items compared to the 10 to 15 of previous years, breaking out with more precision such costs as health insurance, rent and taxes. “We use a much finer level of detail,” he says. According to McNee, by analyzing those items, he’s been able to pinpoint areas for cost cutting. For example, he recently renegotiated his errors and omissions insurance, reducing his expenses by 60%. And he switched to a high-deductible health savings account insurance plan, cutting those costs by 25%.
Build a bigger cash flow cushion. In better times, you might be able to get away with lower working capital levels. But, in a volatile economy, that’s dangerous. While there’s no rule of thumb, you should probably try to increase those levels by 10%. Otherwise, it’s possible that a late collection on a big receivable could tank the business, according to Gaebler.
Know what your break even is. That means determining the sales levels needed to be profitable and doing so weekly, or even daily. “If I know that level, than at least I can trim expenses to make sure I reach it,” says Jeannette Hobson, a small business consultant and group chair with New York CEO peer group Vistage. “That way I can go to bed at night knowing I’ve at least covered my costs.” She recommends a simple way to go about the calculations: Divide your total operating expenses, including such items as rent, payroll, and utilities, by your gross margin. Ultimately, if your sales fall below that level, then you can quickly decide where to trim.
Create a metrics dashboard. If you haven’t already, pinpoint three to six measurements that are essential for evaluating the health of your business, with triggers that alert you to a potential problem. The specific metrics will vary from one company to another. For example, a service business might track payroll to revenue ratio and collections as a percentage of outstanding receivables, while a retailer might look at inventory churn.
Consider Frank O’Brien, president of Conversation, a New York-based marketing and web design firm. Since founding the 15-employee company in spring, 2008, he’s used a handful of metrics, such as the percent of a project’s completion and number of hours spent on each project. While he usually looks at the metrics twice a month, when payroll is due, he also spends at least an hour a day making sure everything is on track. That was particularly helpful earlier in the year, when he started taking on a larger number of shorter-term projects than before. Now, according to O’Brien, he’s been attracting more of the three-month assignments he signed when he first started the business. “As the economy picks up, we’ll have a well-oiled machine able to meet the demand,” he says.
