The global pandemic created unexpected and severe economic challenges, especially for small businesses. In its August 2020 Economic Impact Report, Yelp discovered that the rate of business closures not only increased 23% between July and August but that 60% of those closures were likely permanent. Survival up to this point has required a little luck and a lot of operational belt-tightening.
Hopefully, the worst of 2020’s pandemic-induced recession may be in the rearview mirror. Data from Harvard and Brown University’s Opportunity Insights reveal a significant rebound in employment rates for both high- and low-wage workers. The economic engines are slowly chugging back to life, but the vehicle’s not hot quite yet. The pandemic is still with us, and even with the vaccine rollout, data from the National Bureau of Economic Research (NBER), indicates recessions tend to last 17.5 months, on average.
Don’t let the survival instincts you developed in 2020 fade in the new year. Keep that momentum going by implementing additional changes to your financial operation that can help stabilize your business, even under the weight of reduced revenue. Here are 5 operational strategies we recommend that could have a big impact on the success of your agency in 2021.
1. Proactively trim any fat
Consider cutting unnecessary costs to help build up your cash reserves. Review all of your expenses and attempt to eliminate areas that are no longer relevant or don’t bring in an adequate ROI. For example, take a look at your software licenses. Are there any that you’re not currently using, that are redundant, or that are being underutilized? Cut what you don’t need, or try to find cheaper alternatives that have the same set of features.
You may also need to communicate with your team about expenses. If each department has a budget, meet with your teams to discuss ways to reduce spending. However, make sure you aren’t cutting expenses that are critical to your company’s culture and revenue.
Few parts of your business operate in isolation and cutting expenses without proper consideration could result in unintended consequences. Navigating your finances in this way may not be your cup of tea. If it’s not, consider hiring someone internally to help you explore what needs to be cut, or contract out to someone who understands the complexity of business finance.
2. Strategize cash usage, liquidity, and lines of credit
Your success in 2021 hinges on how you plan for and use your cash, liquidity, and available lines of credit. These are not areas that you want to leave to chance, or only consider retroactively. Temporary shutdowns may still occur in 2021 and cause you to hedge your savings, liquidity, or lines of credit to make it over the hurdle.
Build up a cash reserve — then use it
The bigger your cash reserve, the easier it is for you to cover expenses during periods of reduced or disrupted cash flow. We recommend that businesses of all sizes maintain at least 10% of their annualized revenue in the bank at all times (yes, even in a great economy). A business with $3 million in revenue would need a minimum of $300,000 in the bank at all times.
If your cash reserves aren’t there yet, we recommend you consider reducing your expenses. However, fall back on our earlier advice: Only make cuts that won’t significantly impact your company culture or damage your revenue streams.
Focus on liquidity
Growth in the economy is exciting, but the uncertainty that still exists means you should avoid tying your money into long-term or risky investments. Avoid investments that could cause you to lose your money or lose access to it for more than six months. Instead, place that money in an interest-earning account that you can access immediately and has no restrictions to the amount that you can pull out at any time.
Lean on your lines of credit
Although your existing lines of credit are an effective tool in your cash flow cycle, they may become increasingly important in 2021. Banks tightened up lending in 2020, and they may still be slow to extend new lines of credit to small and medium-sized businesses. Use your existing lines of credit strategically, as they can help shore up unexpectedly weakened cash flow.
Even as you hedge your lines of credit, don’t use them as a crutch to prolong existing financial issues. Now is not the time to keep pouring money into parts of your business that are bleeding money without delivering a proper return on investment. You may need to make tough decisions, like cutting expenses. Your credit lines are there as a resource, but you don’t want to push those tough financial decisions down the road.
3. Improve inefficiencies
Inefficiencies are not always obvious or individually damaging, but they can quickly reduce your potential revenue if you have too many of them. Consider two areas where inefficiencies often exist: your accounts receivable timeline and sales cycle.
Tighten your accounts receivable timeline
Hopefully, you strengthened your invoicing policy in 2020. If not, 2021 should be the year you reduce your accounts receivable turnaround time as much as possible without negatively influencing client relationships. Your cash position will look dramatically different if you drop from a 60-day to 45-day AR cycle, and even more if you shift from 45 days to 15 days.
Consider our chart below which helps illustrate this point. A 60-day AR turn results in a $30,000 negative cash position after a month, while a 45-day cycle gives you $50,000 in the bank at that same point. A 15-day cycle more than doubles your cash position compared to a 45-day cycle.
Proactivity is vital to making this work, especially for larger invoices. As you acquire new clients, communicate directly with the accounts payable department or whichever individual is in charge of billing.
This step involves changing the payment terms and enforcing your policy — that’s it. Communicate with whoever is responsible for paying the bills prior to the first invoice. Verify who should receive the invoice, and at what address. Follow-up shortly after you send the first invoice to guarantee receipt and ensure you avoid issues such as lost or missed invoice emails. You should follow up again a week or two later if the invoice has yet to be paid. Establish a timely payment delivery expectation early that your new clients will adhere to.
Decrease your average sales cycle
A strong pipeline will help keep you sustained through the 2021 growth cycle, but only if you can close the gap between acquiring and closing deals. Consider methods that can help push deals through your pipeline more rapidly. One simple strategy is to be quicker on the draw with your leads.
A study published in the Harvard Business Review found that businesses tend to respond too slowly, even for online leads. The authors note that businesses who respond “within an hour of receiving a query were nearly seven times as likely to qualify the lead than those that tried to contact the customer even an hour later—and more than 60 times as likely as companies that waited 24 hours or longer.”
Automating lead response is an excellent method to reduce your response time. Consider using a CRM, or customer relationship management tool, to handle this process for you. If your sales team is working at capacity, consider hiring additional staff.
4. Play out scenarios
Take the time to explore different scenarios that could negatively impact your business in 2021.
What would happen if one of your largest clients ended its contract with you this year?
Could you easily replace lost contracts with leads in the pipeline, or would any lost contract devastate your revenue?
What steps could you take to have the least impact on your team in the face of declining sales?
What steps could you take to maintain acceptable profit levels?
Creating contingency plans for different scenarios can help you respond more actively and passionately. Getting an unbiased perspective from an outsourced CFO can help you improve the effectiveness of business disruption planning.
5. Explore new revenue streams
Although you don’t want to pour money into new investments, you may be able to increase revenue in 2021 with new revenue streams. This could include offering new products or services. Since you may lack capital to invest heavily in new products or services, try to boost your product or service profile with offerings that take little initial investment. For example, a restaurant may choose to add new seasonal products to the menu that utilize existing ingredients.
You may also want to consider forming complementary business partnerships, sometimes called partnership marketing. This is not so much a quid pro quo situation as it is a mutually beneficial arrangement where you share resources and strategies. You may offer a product or service that can be enhanced by the product or service that other companies offer. If so, reach out to businesses who may share your core values, and whose product or service your existing and new clients may desire.
Don’t go into these relationships unaware. You can damage your own reputation if you partner with a business that has poor ratings. Additionally, you’ll waste everyone’s time and money if you try to add complementary business partnerships or services that your customers or clients don’t want.
Do some background research to determine two things:
What kind of complementary services your existing clients might enjoy
Which businesses are well-rated that offer those complementary services
You’ll need to consider the nature of the relationship, as well. Will you simply offer referrals to each others’ clients? Will you bundle your mutual products or services and receive affiliate commissions? Whichever route you take, make sure the contract is specific and both sides agree to the terms.
The 2020 recession was difficult for everyone. We lament the tragic loss of life and loss of livelihoods created by the global pandemic. You and your business have survived up to this point. Although we’re heading into 2021 with some glimmer of a better economy, we’re not out of the woods quite yet. Analyze your financial operation and shore up any weak spots to reduce your risks.
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