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How to think through Plan B

How to cashflow yourself to the end of the year – tick!

This article,  was prepared by Adina and Margaret from Profitable Insights.

This is again about non-essential product and service businesses that are struggling with their existence and we previously outlined how to cashflow to the end of the year.

To borrow or not to borrow – tick!

If you did your cashflow forecast to the end of 2020, you might have discovered that you didn’t really need to borrow money. Or you did need to, and you now have some room to breathe. Congratulate yourself because you borrowed only after a proper cashflow forecast. Good things come to those who plan – chances are that you ended up borrowing the appropriate amount rather than the desperate amount and you also know what to do with it.

Thinking about the future

When it comes to cashflow for the short and medium-term, things can be pretty straight-forward – you either have the necessary amounts or you don’t. If you don’t, you defer and cut some costs and borrow money and you can balance it for a while. But a cash gap brought about by lack of revenue will catch up with you eventually. The longer the forecast, the more likely you are to find out when that will happen.

When it comes to the longer term and where your business can be, we need a method that allows us to think about it in a structured way along with several reality checks in your financial forecast to help steer the thinking, monitor its outcome and anchor it in reality. This is the time to go back to budgeting and, as painful as it sounds, you need to start thinking about 2021 now.

I am NOT talking about creative thinking and re-inventing yourself. Those are lovely hobbies to have when the economy is going well and when, if you fail with your re-invention or the creative thinking got you spending on pie-in-the-sky projects, you can redress the boat, plug the holes and continue rowing.

This is not the time for creativity for creativity’s sake. Now is the time for scenario planning.

What is Plan A? Hanging in there hoping

Plan A is you hang in there with your old business model with some cost-cutting, cross your fingers and hope for the best i.e. hope that things start coming back while you keep a keen eye on the cash you have managed to source. This is not really a plan. It is something that a lot of us may instinctively do as the lockdown psychologically pushed us into this ‘wait and see’ mindset and it spills into our attitude to our business.

What is Plan B? Re-budget 2020, identify breakeven points and set targets

Re-budget 2020

Cashflow forecasts do not help much when setting up a business model or with structural decision making. The Profit & Loss is our tool for that. Re-budget the second part of 2020 (July to December 2020):

  • Let go of the past – discard what you have forecasted at the beginning of the year
  • Re-budget the second part of 2020 (July to December 2020) assuming 20% to 30% of your revenue coming in
  • Divide the 2020 budget into reporting two half years to see how they compare
  • Compare actuals for the first half of the year against projected for the second part of the year – you may need to wait until June for this.

Why assume between 20% to 30% of your revenue coming in?

From experience, that is most likely what you can get from your long-standing loyal clients, who will send business your way because you are still part of their current plans, either by inertia or because you meet an existing need. Also, this is just a first draft budget – we will finalise the revenue forecast in June when we know a bit more about how the first part of the year will have closed.

If you are one hundred percent certain that you will get more than that, go for it, plug it in. However, if you cannot see where that 20% of revenue could come from right now, go and have a chat with your current clients.

Find your breakeven points

What is a breakeven point = the volume of sales that you need to cover all your cost i.e. get to zero profit in a period of time. The formula = fixed cost divided by the percentage of contribution.

We need now to calculate two different breakeven points:

  1. What is the breakeven point for the second part of the year alone after the forecast?
  2. What is the breakeven point for the entire year, if we try to cover the loss in the first part?

Set Revenue targets

Coming out of lockdown is coming out into the reality of a sales effort. But how big of a sales effort is achievable without burning yourself out?

Plan B will give you a good idea of the loss you will incur this year in the worst case. This is a good place to be – you have control and you now have an idea of what that loss looks like. Nothing to worry about, many companies will be making a loss.

Minimum target – end the year with the loss incurred only in the first 6 months. In other words, your minimum revenue target is the difference between the breakeven point in the second part of the year and the forecast for that period.

Sensible target – end the year by breaking even i.e. don’t have any loss. In other words, your sensible target is the difference between the breakeven point for the year and the total forecast for the year.

The breakeven points will give you a solid anchor to aim for – and anything beyond that is a plus.

Is breaking even in 2020 not ambitious enough? You can definitely aim for higher sales, but from a cost perspective, it is better to plan cautiously – as we tend to spend more when we assume, we will get more in revenue.

Is it realistic to try to breakeven in 2020? It may be too big a stretch for some. Bearing in mind the economic conditions of 2020, breaking even would be a wonderful result. Additionally, breaking even in 2020 sets us up for an easier start when thinking about 2021.

If you would like to think about 2021 with us, take advantage of our free session on the cashflow forecast and alternative planning.

This article was prepared by Adina and Margaret from  Profitable Insights.

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