A highly regarded colleague of mine once lamented “We all know how hard it is for a business to recover from a first quarter loss.” I must admit that I hadn’t given it much thought until he said this, but it’s true. Starting the year off with a financial loss is not a great kick-off to the year and is hard to recover from. In fact, you may spend the next two quarters making up the difference.
If you live in the upper geographic two-thirds of the United States, 2019 has started off with a bruising dose of snow, frigid air, and accumulating ice. What does this mean, aside from prolonged winter blues? It means no one is doing much of anything. Customers don’t get out and shop. Vendors have a hard time meeting deliveries. And even your own employees may have a hard time getting to the office every day, which can delay your company’s progress. Put any (or all) of these ingredients together and you have a recipe for potential financial disaster.
So how do I avoid the negative impact of a long winter? Cut all your expenses immediately. NO, that’s not it – although reviewing them might not be a bad idea.
Inevitably, every January and February we have a few clients that call in asking to reduce contracts or otherwise change their immediate spending. While I understand the panic they may be feeling, it’s important to understand that reactive belt tightening is not the way to run a business. Your mindset needs to change. You need to go from being behind the tide to getting in front of it. Proactive and strategic thinking is how you avoid the negative impact of a long winter.
I realize that statement isn’t helpful for this year, however let’s consider how to make sure you don’t end up in the same squeeze next year that you are feeling right now. First, consider that in most businesses, (especially service and retail, unless you are selling snow shovels and snow removal) revenue is usually down in the first few months of every year, no matter what the weather. That said, you should consider moving any January or February special projects or other flexible expenditures to the 4th quarter of the year before or the following spring. In other words, operate lean for January and February.
Second, let’s say that you have a winter that’s just crummier than usual. Let’s say that there is a foot of snow one week, an inch of ice the next, frigid temps the following and then another blizzard. That probably means a collective 4-5 weeks that your business is dramatically impacted. The answer for this scenario is two-fold:
- Lean on your cash reserves. This is what cash reserves are for, in large part. If you don’t have an available cash reserve (and that’s something we need to fix, by the way), let’s go to number 2.
- Lean on credit. Our financial consultants always encourage businesses to have an available “flexible” line of credit (or LOC) for a rainy day – or a snowy month in this case – at all times.
With either of these solutions it will take the financial pressure off during the worst part of the year. And while you still shouldn’t spend like a maniac (BE LEAN) you’ll be able to continue operating like usual. You won’t feel the need to make further cuts and do anything reactively, or irrationally.
Third – and here comes the big one that you’ve all been waiting for – make sure you have a budget and stick to it year round. I find that in working with small businesses, one of the hardest things for most of them to do effectively is budget. One of the core principles of creating a business plan before you start your business is to develop that operating budget, but most of you are so in love with the dream of entrepreneurship (which I get, and I love it, too) that you skip the budgeting section. This will lead to nothing but bad times. Mega bad times. I promise.
So let’s get a budget set for the whole year. You can do this month by month, average it out, and there you go! When you adequately budget, it will not only help you prepare for highs and lows (such as really terrible winters and really hot summers), but will also help you set pricing, salaries, and more – with much better effectiveness. And yes, the budget will need to be re-evaluated annually, but once you have the first one in place, it will be easier every time.
Now let’s summarize –
Question: How do I avoid the negative impact of a long winter?
Answer:
- Know business cycles and prepare for them. January and February are historically down revenue months. Don’t implement major projects or changes that require more expense during that time.
- Lean on cash reserves, or a flexible line of credit.
- Develop a budget and stick to it.
In other words – BE PROACTIVE NOT REACTIVE. Think strategically.
If you have questions about this article or other business topics, please contact us! We are here to help make your business as robust and healthy as possible.