For many businesses, the global pandemic exposed just how vulnerable they can be to unexpected service disruptions. Following extended shutdown periods, many thousands of businesses were forced to close, with the hospitality, construction and retail industries among the hardest hit.
It provided a sobering lesson for business owners: building financial resilience is important. But beyond being robust enough to weather a crisis, true financial resilience is about building a business that can adapt, survive, and even thrive in the face of uncertainty.
The key is to track your business against key financial health indicators, so
areas of vulnerability can be identified before they become problems. Here’s how:
What are your cash reserves?
Cash reserves are one of the strongest indicators of financial health. If your business were to suffer a Covid-like event again, could you survive for three or even six months with a drastically reduced sales profile?
The important aspects to understand here are:
- What is your break-even point?
- At what level of decrease in sales do you shift from being profitable to unprofitable?
- If you reach a loss situation, how long can you withstand the losses before cash reserves run out?
- How quickly could you downsize to protect yourself and effectively lower your break-even point?
- Do you have a high proportion of fixed costs that you’re stuck with regardless of sales? Or can you build a more flexible cost structure?
A diverse spread of customers
Next, consider your customer profile. How dependent are you on either one or a small group of customers? If your major customer walked away tomorrow, could you survive the hit?
The reality is these scenarios aren’t always controllable. Customers can go broke or be taken over, so you lose them through no fault of your own. What you can control is how much your business relies on the top one or a few customers.
If you’re not doing it already, start tracking revenue from your major customer group (e.g. top 10) and report that as a percentage of your overall sales.
You should also look at your debtor’s position. If a significant customer fails to pay on time (or, worse case, they default entirely), what are the implications? If so, it may be worth considering debtor’s insurance as a defensive measure.
Quality customer procurement
Having reliable, repeatable systems around sales and marketing is another important factor in your ongoing financial health. Questions to ask include:
- Can you readily generate new customers?
- Are you tracking and reporting on marketing efforts, to keep a handle of which methods are the most effective?
- Once you obtain a new customer, do you have a system of integrating them and nurturing them so they will stay?
A common feature of resilient businesses is financial discipline. What I like to see as a minimum is a business having a consistent monthly reporting system that includes a cashflow statement, balance sheet and P&L.
In addition, budgets and
forecasting are monitored and assessed on a regular basis, along with KPIs. These aren’t just a nice-to-have, but can act as an early warning sign that performance might be dropping. And obviously, invoicing should be clear, accessible and up to date, with a defined process for ensuring debtors pay on time.
Is your business overly reliant on you?
If you can’t have a couple of weeks off without being in constant contact, then yes, your business is potentially fragile. No single person should be so essential to a business that their absence puts it in jeopardy. Therefore, it’s vital to ask yourself, if you faced a health or personal emergency, what would happen?
A resilient business has systems and training set up, so employees are clear on their roles and how to perform tasks without frequent supervision. Alignment of performance with bonus pay systems also helps to create the right environment to reinforce strong employee behaviours.
As Michael Gerber wrote in
The E-Myth, systemise the routine and provide the tools and authority for employees to deal with outlier events.
At the end of the day, financial resilience isn’t built overnight. But by systematically addressing each of the areas listed above, you can build a robust foundation for your business. Remember, survival isn’t the goal; it’s growing a business that can navigate whatever challenges lie ahead with confidence.
If you need assistance performing an audit of your current activities, feel free to get in touch.
Read more on our other blogs:
