Having a contingency plan can be the difference between enabling or disabling your company value and net worth
Business is tough enough but never more so than when a challenge such as COVID-19 arrives. And although this pandemic brings its own specific challenges, in general it's similar to other events that cause a business to be challenged with revenue and ultimately cash flow. For this reason, every business owner should always have a contingency plan in place to turn to when times like this arrive. The ultimate purpose of such a plan is to help you prepare your business to weather a downturn such as an upcoming reduction in revenue and ultimately cash flows.
A boss said to me early in my career, the time for creating a good contingency plan is when you don't yet need it. This is because you will not feel stressed or panicked in developing or executing on your plans. You will have clarity of thought and you'll have the time to think through your plans from various angles. Ask yourself now, does my business have a contingency plan in place if an event such as COVID-19 gets worse? If the answer is no, then there is immediate need to develop one.
First thing to do is identify what are the triggering events for your particular business that will give you an early warning indicator that special steps need to be taken. Discuss with your team what leading business indicators will tell you that actions need to be taken soon. For example, if your new business quoting/proposal activity drops to a certain level, this could indicate that in the coming weeks or months that your revenues and then cash flow will be challenged. Or if your backlog of new orders falls to a certain level, this could be a triggering event that lets you know action needs to be taken to eliminate or minimize the negative business impact that is brewing. For some businesses, there is a single triggering event to monitor and for others, it's a series of events such as if BOTH new quotes/proposals AND your order backlog fall at the same time, these two together will let you know definitive actions need to be taken.
Once you have your triggering event(s) identified, next is to identify what steps you will then take with your business to protect it. What I generally did with my businesses is have 2 or 3 levels of actions identified within the contingency plan. Level 1 was basic steps, even easy steps that we could take to reduce our cost structure and help our future cash flow. These might include reducing all non-essential travel, deferring some non-essential expenses or looking at use of temporary labor and reducing it and even revising our forecasts to ensure our material costs were being planned properly. Then identifying Level 2 steps become more challenging but more impactful. These might include freezing all new hires, freezing all travel, cutting back on material purchases, and even knowing what parts of our workforce might be layed off or furloughed. And if you get to a Level 3, these steps become very painful and much more impactful. Work with your financial partner to model these various Levels of contingency plan so you can see where the steps will deliver the protection your business needs. You and your team will get quite innovative when you have a healthy dialog around where your business could cut back if the triggering event or events come to fruition.
But the bottom line is we always had a contingency plan to open and review for the ideas we came up with back when we had clarity of thought. You don't want to be thinking through your actions when you are already at the point of needing them. Have your game plan ready to go and doing so can help you protect and ultimately build your company worth. And as I said to a business owner recently, future acquirers will ask you to review in detail how your business did during a prior downturn and from this it can build or reduce their confidence in your team's ability to manage through a storm. And if the future acquirer doesn't believe your company can handle a storm, their offer valuation will reflect this and you won't be happy, never mind euphoric at time of exit!
