2020 has been a brutal year for the world economies and small businesses in particular. The Covid-19 pandemic appeared without warning and caused many businesses to plunge into a crisis.
Things aren’t getting easier and that means more business owners and entrepreneurs are suffering from financial stress.
No Wonder Small Business Owners Suffer From Financial Stress
The leisure industry is being decimated and the high street retailers are suffering too. Many service businesses involve close personal contact and these have been badly affected as well.
It’s not clear what, if anything, will come out of this crisis. Yes the news about vaccines has been more positive recently but big questions still need to be answered.
Throughout the world, governments are receiving support from their central banks with the creation of “funny money” which could have devastating financial consequences in the future. This has been going on with few breaks since the 2008 Great Financial Crisis and, someday, the system will break.
How can it be right to spend and borrow on the one hand and then create money at the touch of a button to create funds to buy back the government debt to keep interest rates low?
Don’t get me started on Europe.
Everyone should be suffering from financial stress.
In fact, perhaps we can look back over the last twenty years and blame much of the woes on the lack of stress and the evil attractions of borrowing and spending easy money.
Yes, what consumers did, governments are doing on an even bigger scale as their answer to get us out of this mess.
How A Business Owner Can Cope With Money Worries
1 – Understand The Causes Of Financial Stress
The stress starts by having an imbalance between money coming in and money coming out.
At this stage I could talk a lot about the difference between profit and cash flow and the respective merits of each and why, ideally, you need to monitor your business in terms of both.
I’m not going to because, when you’re stressed and struggling to survive you need to keep things simple to understand for yourself and to explain to others.
I recommend you focus on cash flow management and break even point analysis.
Especially cash flow because at this stage, cash really is king and the life-blood of your business.
Focusing on cash can hide some longer term issues but businesses go bankrupt because they run out of cash.
They run out of cash to:
- Pay wages and salaries to the employees
- Pay suppliers to keep getting supplies
- Pay providers of loans the interest and loan repayments
- Pay the business owner for time and money invested in the business.
If there is no cash, these stakeholders remove their support and there is little or no business left.
If the business is cash rich, it can have an ostrich like “head in the sand” routine while it lives off the resources that have come from past success.
At the other extreme, if the business started with loans, then it is immediately under pressure. It literally has nowhere to go. A crisis quickly becomes urgent.
Somewhere in the middle are many businesses that have a bit of reserve but not much. They have some time to take action, but they can’t afford to delay.
A useful measure is cash burnout rate.
This is cash reserves divided by the average monthly shortfall.
It gives an indication of how long the business has left.
E.g. Cash resources of £10,000 / average cash shortfall of £2,000 indicates 5 months life.
Cutting the cash shortfall from £2,000 to £1,000 will extend life from 5 months to 10 months.
Having a longer future reduces the stress. It doesn’t take it away but it does give more breathing space and thinking time.
2 – Changing Your Mindset On Your Financial Stress
You need to accept responsibility for taking action.
Don’t blame the government, customers, suppliers or employees for doing what makes sense to them.
You need to move from “It’s not my fault, I can’t do anything” to “I can do something. I will do whatever’s necessary.”
Creating a feeling of control will reduce your stress. It’s horrible to be out of control.
3 – Take Action To Reduce Your Financial Stress
Your aim is to focus on your cash burnout rate and to turn it from a weakness that signals imminent danger to a strength.
You can improve it by reducing your monthly cash shortfall by increasing cash inflows or reducing cash outflows.
Ideally you should look for ways to do both.
If you can turn your cash shortfall into cash generated for one month, your top line of cash resources goes up, increasing your business life, even if your long term cash shortfall continues at the same rate.
If you can turn it into regular cash generation two months out of three, your business should become stable. For some reason, I’ve found that cash generation months are always smaller than shortfall months… an example of two steps forward and one back.
If you do better than that, then the ratio becomes much stronger and things can quickly improve.
To reduce your cash outgoings, use zero based thinking. It’s a great question for shifting your mindset and focusing on particular issues.
To increase your cash incomings, you need to generate more business in ways that will turn quickly into cash generation.
4 – Protecting Yourself From Stress In The Future
Humans have a nasty habit of spending what they earn and a bit more.
Earn £2,000 per month and spend £2,100.
Earn £20,000 per month and spend £21,000.
You need to break this habit and learn to save, even at low income levels.
It’s only by building up cash resources that you will be free of money worries.