How to Stabilize Business Finances During Uncertain Times
Since 2020, most of the world has faced its fair share of “uncertain times.” Uncertain, unprecedented, unpredictable. These are all words we’ve heard blasted through the media. Depending on the field you work in, you may have found yourself with a much-decreased client roster or with a total loss of income.
While a global pandemic is not a common occurrence, the truth is: there is always something. This can sound discouraging, but I prefer to think of it as empowering. Things will happen outside of our control, but we can identify the elements we can control and manage those. After all, it’s not what happens but how you react to it that matters.
How you prepare for uncertainty can affect your finances and even in your long-term success. Here, I’ll show you six ways to secure business finances so that you can weather even the biggest storms.
Stock up your savings
CASH IS KING. That’s what we always say. Basically, the best advice to build a stable business is to hoard cash when things are going well. That’s because, if you run out of cash, you’re most likely out of business.
Many experts recommend that you need 3 to 6 months of savings “in case of emergency” for your personal finances. It depends on your risk tolerance and even your industry. Seasonal businesses need a much bigger savings buffer than a business with steady operations year-round.
Here’s how to get started calculating your savings buffer:
Run your Profit and Loss Statement for the past year, broken out into columns by month.
Download the statement into a spreadsheet.
Look over the expenses each month and calculate your average total monthly expenses. You can calculate the averages by expense type (row) and month (column). You can ignore any uncommon expense (I’ll delete the cell).
Build up your savings until you have at least 1 to 3 months of expenses saved.
Then, should you have a slow month or face a larger crisis, you can pay all your bills for at least 3 months. That peace of mind will lessen any worries about your future so you can instead focus on what’s happening now.
Not sure when you’ll need to use your savings? Use a cash flow planner, like Fathom, to predict your future bank account balances. This will help you see any major dips and plan to avoid them.
Know your profit margins
You probably know that it’s important to make a profit on your goods or services, right? Of course. Well, when it comes to calculating profit margins, there are two terms you should know:
Gross profit margin (GPM) and profit margin (PM). I’ll explain the formula first and then give you an example.
You calculate PM by calculating your revenue minus the cost of goods sold. Let’s say you made $100,000 in revenue and the cost of the goods sold is about $70,000 (to pay contractors, pay for materials, etc.). That means your remaining profit is $30,000.
Your gross profit margin (GPM) is your revenue minus the cost of goods sold divided by revenue again. Using the same example as above that means you’d divide $30,000 by $100,000. That’s a 0.3 GPM — or 30%. Very healthy.
Of course, what is defined as a healthy PM and GPM depends on your business. If you have a physical product-based business or even an in-person location, your PM/GPM will be lower than, say, an entirely online business owned and operated by a single person out of their home.
To find what’s normal for your type of business, you can research stats and ask others in your industry.
As a rule of thumb, 5% is a low margin, 10% is a healthy margin, and 20% is a high margin. If you have an online business, I’d even recommend a 30% or higher profit margin. Do a few quick calculations. Where does your business stand? If you’re realizing your profit margin is lower than you’re comfortable with, skip to the next step and start to evaluate your expenses.
Keep it lean
For most Millennial entrepreneurs, you didn’t need VC funding or even a loan to start your business. Most bootstrap it and fund their business with a few thousand from their personal savings. If you can relate, this step won’t feel as restrictive to you.
Keeping it lean in your business means that you are watching costs and saving wherever you can.
Cancel subscriptions that are nice-to-haves, not must-haves.
Pay for only what’s necessary, like office space, technology, contractors, etc.
Take the time to reevaluate your plans so you don’t invest in things that won’t without really considering how they’ll help you.
Stay aware of your income, your expenses, and what investments you need to make to move the business forward.
If you suspect your expenses are becoming inflated when compared to your income, it’s time to look at your statements and see what can get cut. Cut out any non-essential purchases and review all your expenses to find where you can trim down. Essential costs include rent, labor, and the inputs to creating your products and services. Other than that, everything is negligible.
Set aside money for taxes throughout the year
Nothing shakes your financial foundation faster than a hefty, unexpected tax bill. I get it: saving money for taxes is hard because it’s expensive. You can use that cash now, right? However, according to Liberty Tax, some businesses need to set aside up to 40% of their business income to cover taxes. Are you saving enough to avoid that massive tax bill? Maybe not.
There is good news, though: A simple saving habit can help you avoid this tax drama. When you make it a habit to set aside a percentage of your net profit, you can rest easy knowing that you can afford your tax bill when it comes due.
How much should you set aside? Unfortunately, there’s no hard-and-fast rule here; the best thing to do is look at your prior-year tax return, find your effective tax rate (total tax divided by income), and save that percentage each month.
Once you’ve settled on a percentage to set aside, start automatic transfers to a bank account or even using the Envelope Method. Essentially, you set aside a percent of sales into an envelope (or a bank account if that’s easier) to save money for taxes. You can also do a percent of profits if you’re making more profit in your business.
Worried you’ll just be eating into cash flow? Look at it this way: If you save this money and then owe fewer taxes because your profit is down, you have more of a savings buffer. I just really don’t recommend that you stop setting aside money for taxes — it can bite you in the butt later.
Keep a positive mindset
While I just spent this blog sharing tips on how to prepare for uncertainty in your business, I also want to focus on the positives. You’re already used to uncertainty. When you started your business, there were no guarantees. You didn’t know if you would succeed, but here you are.
Each time you send out a new proposal or design a new product, you’re stepping into the unknown. That’s powerful — and that momentum will help you weather other storms.
Anytime you find yourself in an “unprecedented” situation, you can choose to see it as an opportunity. Even if your revenue is down or you’re unable to book new clients for now, think about projects you can work on internally that can 1.) save you money 2.) get you ready for when things stabilize again. You’ll have your emergency fund to help keep the lights on, and you can use any downtime you have to the fullest. If sales are slow, work on time-intensive projects, not money-intensive ones.
Plus, nothing gets those creative juices flowing like uncertainty. Use this time to brainstorm new solutions, products, or services that can help people where they are right now. I’ve seen so many amazing new ideas come from lockdowns related to the pandemic — and you can use future challenges to do the same.
Create a consistent bookkeeping process
Last but not least: To keep your business stable in uncertain times, you’ll need a bookkeeping process. This is a foundational step that helps you do the steps I’ve shared above. You have to keep up with your books so you can adjust as necessary. watch for fluctuating costs, and conserve cash wherever possible.
However, between legal filings, taxes, monthly bill due dates, and other admin work, keeping track of your finances even in good times can be confusing and time-consuming. There’s so much to stay on top of!
That’s why I created a Biz Wellness Plan & Accounting Schedule. This plan will help you track down what you need to do and set up a system to make sure nothing slips through the cracks. This way, when something happens and you need to focus on bringing in more business or being more attentive to your expenses, you know exactly where to go.
Don’t Forget Another Due Date
This plan will help you track your financial and tax to-dos, so you’ll never be blindsided by a tax payment you didn’t expect again.