As I write this the whole world is in crisis. The COVID-19 pandemic is turning our lives upside down. When this is all over the sad fact is, many of our favorite businesses will no longer be around.
Very few businesses are prepared to weather the storm that the Coronavirus situation is causing. Most of the advice I will give here won’t help you now, but if you survive this turmoil it will definitely be something you want to have in place.
The importance of this advice is now apparent. A business, as well as an individual should have at least 6 months worth of operation/living expenses in savings. This way, you can stay fully operational without worrying about revenue.
Many businesses know this advice but don’t head it. Or struggle to actually implement it. Other times it just may be that the business is so green they haven’t been operating long enough to save the cash they need to weather a storm.
In my previous business, Bearded Brothers, we had many “storms” come our way. From broken equipment, to pest invasions. We never had the cash reserves to fund these emergencies, which left us leaning on credit. The long term result of that was the inability to fund new growth and support promotions in stores, that were key to help the business thrive.
Long story short. It’s VITAL that your business operates in such a manner where you are putting money into savings on a monthly basis so you can weather any storm. Or at the very least, make them easier to get through
The Profit First Survival Guide
I’m a huge fan of Mike Michalowicz and his Profit First plan. (Amazon affiliate link, helps support the site)
Traditional accounting tells you that profit is anything you have left over after you deduct expenses. It’s the “bottom line.”
But profit first principles put profit at the TOP LINE.
Let me explain it to you in the simplest terms I can think of.
After you subtract your cost of goods from your top line revenue, what you are left with is what Mike calls, Real Revenue.
Now take 5% of that number and move it into a separate bank account called the Profit Account.
This becomes your DO NOT TOUCH emergency fund.
The other 95% goes to things like payroll and operating expenses, and tax savings.
Separate Bank Account to Keep you on Track
After I sold Bearded Brothers in 2018 I started Hemp Daddy’s Therapeutics, a direct to consumer CBD oil company.
I implemented the profit first system from day one, and I have been profitable ever since. It has even helped me to not make any major missteps that would sink my business.
The system utilizes separate bank accounts and allocations percentages that become “spending buckets” for different areas of your business.
Below is an example of how the Profit First Accounting System Works.
Let’s look at a sample revenue figure for a theoretical energy bar company.
Acme Energy Bars earns $100,000 per month in revenue. Following the Profit First formula looks something like this.
For simplicity sake, let’s say Acme Energy Bars has a 50% Gross Profit Margin, and revenue is constant with zero growth.
50% of $100,000 is $50,000 so that is what we call “Real Revenue” and should be allocated to the following categories.
5% Profit = $1,250 (This becomes your rainy day fund)
50% Payroll = $25,000
35% Operations = $17,500
15% Taxes = $7,500 (this is the business saving to pay your taxes)
This system essentially gives you guide rails for how to spend your money.
Having them set up as separate bank accounts will also prevent the temptation to steal from the other accounts to cover costs.
A Real Picture of Your Business Health
Utilizing this system gives you an accurate picture of how healthy your business actually is.
Most entrepreneurs make buying decisions based on how much money is in their bank account on a given day. Often forgetting things like a “rainy day fund” and/or tax savings.
Knowing your “monthly nut” is also crucial. What it costs to keep your business running each month.
When you know where every dollar of your business is going, you know how much you actually have to spend.
Thinking about increasing your marketing budget? This system will let you know if you actually have the available funds to make that happen.
Once you know that number you will know exactly how much you need to keep the business operating each and every month. It will also allow you to see if you have had enough of a revenue increase to justify certain expenditures.
In other words. Don’t spend money you don’t have to spend. Otherwise you are setting yourself up for shortages, which will lead to taking on debt to keep your business running.
When tough times hit
Just two weeks into the COVID-19 pandemic and businesses are already laying off staff, and even closing their doors. They couldn’t even weather the storm for two weeks! How sad!
Essentially it all comes down to being smart with your money. If you are smart with your money today, you will be able to survive any storm.
And once rough patches come your way, you won’t have to lay off your entire staff. Sure, you might have to cut costs in some areas, which is smart…because if the pandemic lasts longer than what you have in savings, you can potentially extend your runway.
It’s also time to get creative when tough times hit. Which is why I’m starting this blog. I’m seeing this as an opportunity to create a second stream of income for my family in the event something like this happens again.
Maybe your business is struggling right now. Maybe you don’t have the cash reserves to weather a storm. Well it’s time to get creative.
Rather than sitting back and saying, “woe is me.” It’s time to think outside the box and figure out how you can serve the community around you in a new way.
Restaurants are doing a great job at steppin up and offering delivery services, when that wasn’t something they previously offered. I’ve seen business centric entrepreneurs offering new courses about how to survive times like this.
My Instagram has also been filled with more ads than usual. Many of them offering some sort of solution to the COVID-19 craziness.
What you can do NOW
If this whole thing has caught you unprepared I get it. I have to admit, I’m not totally prepared myself. Towards the end of last year I ended up investing in some marketing efforts that did not pan out. I had the extra cash to spend, but at the same time my profit account was not build up to where it should have been. Hind sight is 20-20.
So, here are some things I’m doing to help my business survive this tumultuous time.
- Staying in touch with my customers. I’m not scaling back my email communications. In fact, I plan on increasing them. With more people sitting in front of their screens, I have a captive audience, and people are craving social interaction right now
- Cutting costs. My budget was already pretty lean, but I’m cutting costs where I can. I’m not cutting my marketing budget though. I still have a certain amount set aside every month for marketing. For some of you that might have to change. It might for me as well, but for now It’s still in place, and I will continue to market in a time when others are pulling back.
- I’m also starting to pursue new ideas. I’ve been considering starting this blog for a long time now, and here it is. I’ve also been thinking about getting back to Podcasting, and I have lots of ideas how I can use YouTube to reach out to people as well. Maybe these mediums aren’t for you, but what are some things you can do to reach your customers?
- Taking it all in stride. I’m not letting the news media get me down. I know that at the end of the day I will survive. You will survive. The entire world is in this pandemic together. I think we will see a lot of people helping each other during this strange time.
- Keep looking for opportunities. Don’t sit back mindlessly scrolling through Facebook and Instagram. Keep on working!
- One creative idea I just heard that could help consumer packaged goods brands is to reach out to businesses that are closed such as Yoga studios and gyms, and offer them an affiliate code for your product. This will help you continue to do business and also help the business that has closed doors.
The Sun is Shining Behind The Clouds
As I was on my run this morning, the sky was covered in clouds. But behind the clouds the sun was high in the sky and shining. Despite the dark cloud of coronavirus around us, the sun’s still shining, and we will see it again when the clouds part.
My hope is that we all come out of this changed people with new perspectives, and a newfound appreciation for life. I also pray and hope many people find Christ during this crazy pandemic.
I heard somebody say the other day “nobody is coming to save us.” They were alluding to world wide problems as a whole…that coronavirus is starting to expose. While there is some truth to that, somebody has come and saved us already, and he will return again to renew all things and make all things perfect and right, and free or viruses and fear.
But, even before that day comes. He shines his common grace on all men, and we will get through this pandemic. It won’t be without loss, but it’s not the end of the world, and we will emerge stronger than ever before, and hopefully a little more compassionate.
Get started with Profit First (Amazon affiliate link, helps support this site)