What-If Scenario Planning: Tips To Minimize Losses And Thrive Through Troubled Times
Unless you’re under a rock, which probably isn’t a bad place to be right now, there are a lot of significant changes taking place in the world today. Most likely, these changes are going to have an impact on you, your family, your community, and your business. It’s a really good idea to look internally and critically evaluate your options.
- Do you shut down?
- Do you ride things out?
- Do you wait until something specific changes?
These are all questions we as entrepreneurs and owners are asking ourselves. These are also questions we should proactively find answers to.
Here are the steps I’m going through with my clients to proactively respond to the coronavirus epidemic and thrive through this thing!
I invite you to watch the video, utilize the full transcript, and use the info to evaluate your business. I hope this helps! Please reach out if you have questions or need assistance.
Full Script
Unless you’re under a rock, which probably isn’t a bad place to be, there are a lot of significant changes taking place in the world today. Most likely, these changes are going to have an impact on you, your family, your community, and your business. It’s a really good idea to look internally and critically evaluate your options.
- Do you shut down?
- Do you ride things out?
- Do you wait until something specific changes?
These are all questions we as entrepreneurs and owners are asking ourselves. These are also questions we should proactively find answers to.
An exercise I’m going through with my clients right now is ‘what-if’ scenario planning. The scenarios we’re playing out are: What if things rebound before summer (all good)? What if this rebounds mid-summer (break-even)? And what if there is no rebound at all (total shut down)?
I’m going to give you all you need to know to do this What-If Scenario Planning exercise in just a minute. There is a lot of info here so stick with me, watch it once, watch it twice, and reach out if you want help doing it. This stuff will reduce your losses. It is also good to do these exercises in regular years to boost pay, benefits, profits, you name it.
Are you ready?
There are a few key things we look at, all of which I’d highly suggest you nail-down for yourself as well. Start with the worst-case scenario. Before I go into this, these are the things your should ALWAYS have a pulse on. Regardless of economic crisis or not. Knowing these all the time will drastically reduce stress around money and help make sensible decisions all year long. If you don’t know this info, use this exercise as an opportunity to discover it now and make this a priority to evaluate frequently.
Scenario 1: Total shut down.
- Identify fixed cash demands. This includes contracts for leases, professional service agreements, any vendors you’re in year-long contracts with that you can’t simply shut down today, and any customer pre-payments you are currently holding on to. It includes debt payments, wages paid to key employees you can’t afford to lose including yourself as the owner and top managers. Total these up and figure out how much cash you need to pay these if you were to close your doors today. Be sure to look long term with these as well. What’s that total until next year when season starts up again? Itemize these out and think up a plan on what to do with each of these should something happen. You’ll probably need to read your agreements, call up banks, maybe even discuss your options with an attorney.
- Identify re-boot expenses. If you were to shut down today, what would you need to spend to re-boot next season? What would you need to do to re-recruit guides, employees, and more? What professional help including advertising and promotion will you need to jump start next year? Itemize these out as well.
- What’s that total? Total all future cash demands, including fixed cash demands (including your owner pay) and re-boot expenses.
- Look at your cash reserves. How do these fixed cash demands and next year re-boot costs stack up against your cash reserves? If your cash is higher, then you’re in good shape and have some flexibility with decision making. If your cash is lower, then you need to look at alternate funding. Where are your personal savings balances and see if you as the owner can personally afford to float the business until next season. If not, then what options are available to help fund the business? This can include third party investors, debt arrangements, or government bail out options (which could be something that arises during this disruption). Just know, investors and debt must be paid back. It’s often in your best interest to avoid these as much as possible. If you can’t avoid these, then I highly encourage you seek help and potentially council.
Scenario 2: Break-even.
We now know your total fixed cash demands. Now let’s investigate your variable costs to provide your service to your customers. These are the items that directly correlate to delivering your goods and services to your customer. In the tour and outfitting world, these are your guide costs, transportation costs, fuel costs, trip meals and so forth. From a customer’s perspective, it is essentially what I’m directly getting in return for the money I give to you. These are called your cost of sales. What you should know about these, and if you don’t know this, what you should find out… Is your gross profit margin.
How you calculate your gross profit margin is totally up all costs of sales and divide by your total revenue. This is amount it costs you, the business, to deliver your product or service. Subtract this percentage from 1 and you have your gross profit margin percentage. The gross profit margin tells you: for every dollar you sell, the business retains X dollars. For example, you sell a $100 trip. You know it costs you $25 to deliver that trip. $1 less $25 is $75. Your Gross profit margin percentage is 75%.
Take your total fixed cash demands from scenario 1, divide this total by your gross profit margin percentage, add in 10% to 20% for tax savings and unforeseen issues and vwalah! You have a safe break-even point. This means, in order for you to pay your fixed costs including key employee wages, owner pay, and deliver your services to your customers, you need to sell at least this amount to break even. Look at this number. Considering everything going on… Is this manageable? Is there no F*ing way? Use this knowledge to help you decide to stay open or not.
Bonus: It’s a good idea to know your gross profit margin for the full year as well as the different seasons within the year: whether it be quarterly, monthly, or other set periods of time.
Scenario 3: All is good.
All’s good! Nothing really to do here…. Other than count your blessings that this shit storm didn’t turn into anything bigger. Use it as a learning lesson to always have your finger on the pulse of your long-term cash demands, the contracts you’re in, know your gross profit margin, and understand your break-even point.
Double Bonus: Use what you learned during the previous two scenarios and do some standard expense management tactics: cancel unneeded subscriptions, renegotiate with vendors, rebalance employee efforts, and more. This is how you use the info to maximize profits, boost your business, and setup cash reserves so you don’t have to stress about these situations again.
Triple Bonus: To the next level would be to define your needs as the owners, calculate your annual compensation including pay, profits, tax savings, and more. Combine that with the information captured in these scenarios to determine the price you charge to your customers and ultimately position your business to meet your personal quality of life goals.
In Summary
You should have all the stuff to play these scenarios at your fingertips. If you don’t, your accountant or bookkeeper will. Also, your chart of accounts might need to be re-organized to easily capture this information. This is not hard to do, it will take some time, but will be well worth it.
You do this scenario planning for your business and you will be much more confident in your future… or at least have a better direction on how to handle this epidemic.
If you find this info useful, or if there’s something else you want me to dive into, please use the comment box below and let me know. You can also shoot me a message directly.
Keep your heads up! Don’t freak out, wash your hands, and distance yourself from society for a bit. A lot of business can be done virtually so be productive from the safety of your home and start doing the right things to make the best informed decisions for your business.
