Financial survival has been top of mind for many business owners since the first lockdowns were declared in March of 2020. Almost 40% of Canadian entrepreneurs are now trying to balance rebuilding their financial health against business needs

How to manage your finances to ensure the continuity of your business?

Here are few cashflow strategies that will help your business survive during time of economic downturn or catastrophic events such as COVID-19.

1. Agility is key

Business owners who are agile can pivot their operations and optimize their sales reducing the impact of the economic slowdown.

2. Lower expenses

Lowering expenditures to reflect reduced revenue can help businesses break even and keep their doors open.

3. Operate safely

Your customers need to be protected and feel safe to do business with you. Your employees must have a safe work environment. Ensure your communications are clearly marked for customers and your employees are well trained.

4. Curtail unnecessary spending

Watching your margins during any reduced revenue period is critical. COVID-19 in a way, has been a live exercise in business survival. Stay on top of accounts receivables and manage your payables to the latest date possible. Negotiate longer payable terms where possible e.g. ask to move from 30 days to 60 days.

5. Plan ahead

OK, this one seems common sense although, when your busy fighting fires it’s easy to get caught up in the “right now.” Some of those fires are showing up because you didn’t plan far enough ahead. Get in front of your problems and forecast further out.

What’s Your Business Interruption Strategy?

Many years ago, we had a 120 seat cafe/restaurant with a liquor license that was extremely successful. Literally a line at the door. So busy in fact, I slept on a cot in the back (closed at 2 am and opened at 8 am) during our 1st year.

When the sun is shinning you’re not thinking about umbrellas!

~ David Aaron

It was August, our busiest month of the year and construction had began in the parking lot to remove an old building to make way for additional parking. The construction company accidentally cut the water main flooding the parking lot. The entire parking lot was closed off and torn up. They piled mounds of pavement, stone and dirt right in front of our business. You actually couldn’t see our business. Sales revenue in August was normally $80-90,000…we did $6,000!

The landlord provided a $1,700 credit towards our lease and do you think that made any difference? We never considered planning for such an event. We had 16 employees, perishable food inventories and just like that disaster!

Planning for the worst case scenario

1. Break-Even Analysis

Add up all your fixed expenses such are lease, salaries, communications, interest and principal payments on loans. Then, divide this by the margin you earn on each sale (usually a percentage).

If you think your business might not earn break-even levels, you may have to consider cutting your expenses to the strict bare minimum. Consider temporarily removing products/services which are unlikely to break-even during this period.

2. Do some “Spring Cleaning”

Time to sell anything you haven’t used a long time and will unlikely ever use it. Such things as, equipment & vehicles. Cash is king here! Examine where you can get short-term financing.

3. Renegotiate fixed costs

For our restaurant, we negotiated with the landlord to reduce the lease over a several months and increase the lease payment during our higher business volume. Examine if this is possible with your business. Heating & Air conditioning is one are to consider. Adjusting the temperature by 1-2 degrees over time reduce your energy bill. While it may be a little uncomfortable, the alternative is far worse.

4. Change Your Pricing

Modify your pricing on items with the highest margin to increase the margin. One example in our restaurant was, in the winter strawberries are very expensive comparative to the summer. We increased our price for a top selling menu item by a nominal amount and removed strawberries from the menu. Instant boom to our bottom line.

5. Flexible Working Arrangements

Can you work from home or move to a co-working space to transform fixed rental costs into variable costs. Can any employees work from home?

6. Pay attention to giving out credit

Scrutinize new clients on their credit worthiness. When sales volume is low you don’t want to take on a delinquent new client. Also keep a closer eye on customers who are falling behind with their bills. Ask for a partial payment to mitigate a larger delinquency – receiving some cash during these times is better than none at all.

7. Establish and maintain strong credit

“But I don’t need credit right now.” Establishing lines of credit is essential in business. Even General Electric ran out of credit during the 2008 financial crisis. Using credit during normal business cycles is good financial management. Having access to credit during economic contraction is critical to business sustainability.

8. Death by a thousand cuts

Pay attention to the small almost invisible expenses. They can add up to quite a bit:

• Subscription services for social media platforms. LinkedI n is $100 per month for Sales Navigator. Perhaps a pause on this and similar accounts is necessary
• Paid advertising – if you have modified your product/services discontinue ads which are promoting those items
• Data charges – If business volume is low do you need to have the highest data package?
• Infrastructure costs – During COVID-19 you’ve been paying for infrastructure to support a business at 80-110% volume when in fact you may have been at 20%. You need pivot quickly to reduce these costs.

According to the Small Business Administration, a third of businesses with employees don’t survive beyond two years. But once you’ve made it through the difficult startup period and your business is on sound footing, it’s time to think about expanding locally. 

Building out your business can lead to sales growth that allows you to stay ahead of the competition. Expansion can be risky and increase debt, and it takes time and resources. But the potential rewards can be worth the effort. With sound planning and execution, it’s a manageable task. A sound marketing strategy is key, allowing you to build awareness of your brand in the public eye. That can even lead to an increase in customers. 

Conduct market research and formulate a plan

Start by conducting market research. While this may sound costly or complicated, it can be as easy as talking to your customers about your products and services or asking them to complete a short survey. For Internet companies and e-tailers, there’s free or inexpensive online software that enables you to email questionnaires to your customer list. 

Once completed, use the valuable customer feedback to assemble a marketing plan, such as what the Small Business Administration outlines. The information will help you understand your target market and your competitive position within that market. You’ll be able to better tailor your message to your customers while choosing the best medium for reaching them. 

Also, a marketing plan will help you stick to your overall growth plans and keep you on budget and on track for timely, prudent spending of your marketing resources.

Head online for local advertising

Your company website will serve as one of your primary marketing tools. It’s a virtual storefront for online customers, whether you’re selling products or services. Ensure your site is up to date, easy to navigate and has a design best representing your business. If a large portion of your business occurs online, consider creating a mobile app to allow your customers to shop with their smartphones, or at least develop a responsive, secure website. A well-made app can make for an easier, more interactive shopping experience.

With a company website and app, you can take advantage of marketing opportunities by adding navigation software that allows you to track a customer’s visit to your online business. You can automatically send related product suggestions based on their searches or create online tools to deliver coupons, special offers or one-time sales promos. Offering loyalty or club cards can encourage return visits.

Free enterprise and social media

One sure way to stay on budget is to take advantage of as many free marketing opportunities as you can. For instance, Google My Business allows you to set up an account listing vital business info, including your address, phone, hours of operation, website link, business description and even a photo. This ensures the correct details appear in online searches and can give your business a boost in search rankings. 

Establish accounts on popular social media platforms such as Facebook, Twitter and Yelp, which offer excellent opportunities for engaging with customers and advertising special events or offers. It’s important to check on the sites regularly and post updates on a consistent basis. Another strategy for building traffic to your website is to add a blog where you can post news, tips and articles on subjects related to your business.

Paid media

Traditional marketing methods have long helped owners grow their businesses and should be an important consideration for any local marketing strategy. Although marketing is increasingly shifting to the internet, purchasing an ad in a local newspaper can still be the best way to reach a target audience if you run a retail outlet such as a furniture store.

To promote specialized products, consider advertising in specialty magazines or trade publications. If you want to better gauge the ad’s effectiveness, include a coupon or discount for subscribers that they can redeem at your business.

A similar strategy is to buy local advertising spots on a TV or radio channel. Your local station’s ad sales team should be able to provide information on its listeners, including detailed demographics and audience size at each point in the day, to help you choose the best program and time slot for your ad. Flyers and coupons sent via direct mail are another option for businesses interested in reaching a wide audience.

Paid digital marketing

Digital advertising is a logical part of any marketing plan. It can seem complicated, but a well-placed digital ad can reach the largest audience in the shortest amount of time. 

Consider advertising with the online version of your city newspaper or another local news website or popular blog. For a more targeted approach, advertising through business services that some of the largest social media companies now provide and some smaller ones can also ensure you reach a desired group. 

A Facebook business account allows you to pinpoint a demographic and choose the frequency of your posted ads. Likewise, Google AdWords targets your ads according to a user’s online searches. Both companies provide analytics for you to see precisely the effectiveness of your ads.

Whatever your approach to marketing and advertising, growing a business is an exciting time. Acquiring property, liability or business interruption coverage, can give you the confidence to focus on growth.

Planning can help you significantly reduce your tax liability in a succession. Failing to do so could mean the business has to close or be sold. Or perhaps it might have to incur an unhealthy level of debt.

Taxes are one of the main considerations when it comes to family succession. Without proper planning, you can wind up with a larger-than-expected tax bill in a family succession and have no way to pay it.

It’s important to get started early on to structure the transaction in a way that minimizes your tax liability. It can take several years to implement the optimal structure.

Here are the steps to consider. (Note: You should get professional tax advice about your specific situation. Also, rules differ for fishing and farming businesses.)

1) Start early—Consult a tax expert early on about the tax consequences of a succession. Many entrepreneurs wait too long and the transition ends up happening in a crisis—for example, due to a health issue or death. That can lead to lost opportunities to save on taxes.

The worst-case scenario is that the business passes to a child on death, but the family doesn’t have the means to pay the tax on the accrued capital gain.

2) Minimize capital gains tax—Whether you pass on your business in a sale or give it as a gift to a family member, it’s deemed to be disposed of at its fair market value. You are taxed on half the gain in the company’s value (as a capital gain) at your top tax rate. The capital gain is calculated on the difference between the business’s initial share cost and today’s share value.

(There is an exemption for a transfer to a spouse, in which case the gain and tax are deferred until the spouse sells or gifts the business.)

If the business is a qualified small business corporation, you can claim a lifetime capital gains exemption to reduce this tax. The exemption is $824,176 in 2016, meaning a gross gain of up to this amount is tax-free. The exemption is indexed to inflation and, hence, increases each year.

To qualify for the exemption, a company must meet several conditions. For example, it must have been owned by the same person for the past 24 months, and at least 90% of its assets must be used for business primarily in Canada at the time of transfer. See a detailed list of the conditions here and more information on the capital gains exemption here.

3) Consider an estate freeze—An estate freeze is a way to essentially lock in the gain (and capital gains tax) based on the company’s value. A common way of doing so is by exchanging your common shares in the company for fixed-value preferred shares, and then issuing common shares to your children. Any future growth in the company’s value goes to the common shares and isn’t taxed until your children in turn sell or gift their shares. The shares can be held by the children directly or in a trust.

4) Think about incorporating—If you haven’t already incorporated your business, think about doing so. Owners of an unincorporated business don’t qualify for the lifetime capital gains exemption and generally can’t do an estate freeze.

5) Defer taxes—You may be able to defer some of the capital gains tax if you help finance the sale and are being paid over several years. In this case, you may be able to declare the capital gain over the duration of the payments, for up to 5 or 10 years depending on the circumstances.

Planning a successful business succession takes years. According to experts, transitions can take up to five years to complete and, in the case of a family business, as many as 10, depending on the firm’s size and complexity.

A recent survey of 2,500 entrepreneurs found that five out of six entrepreneurs surveyed estimate that the process will be completed in two years or less from the time they meet with potential buyers to the moment the eventual sale goes through.

For entrepreneurs planning to sell their business, the best strategy is usually achieved by not rushing things and by taking the time needed to ensure a smooth transition.

Creating a succession plan is a great way to ensure you get the full value for your business or are able to pass it along the way you had hoped. This is especially true if unexpected trouble arises, such as a surprise health problem.

Here are five reasons why you shouldn’t wait to start succession planning.

1. It clarifies your options

You may have an idea in your mind of what your succession will look like, but you may be in for a surprise when you go ahead with it. For example, your plan may be to sell your business to an external buyer. But many entrepreneurs struggle to find an outsider willing to purchase their company. Instead, an internal successor—such as a family member or manager—may be your best candidate to take over.

2. You can prepare your successor

If your successor is a family member or manager, you need time—five years or more is normal—to get them ready. They need to learn how all parts of the business work, gain needed expertise and build relationships with employees, suppliers, and customers.

3. You can prepare your company

You need time to optimize the sale value of your company. This means making sure it has good growth prospects, a record of profitability and a solid balance sheet. You may need to invest in the business, remove personal expenses from the books and consult an accountant on how to structure the sale to minimize your tax liability.

You also need to prepare your company to operate without you. For example, you should document your business processes so that someone new can easily take over. Your employees should get training so they consistently execute these processes as documented.

4. You can arrange financing

You need to start talking early on with bankers about financing for the transition, especially if it involves an internal successor who doesn’t have a lot of capital to invest. You may have to use a mix of financing, including the buyer’s investment, vendor financing, a term loan, and mezzanine financing.

5. It’s an emergency plan

Many entrepreneurs have a hard time letting go of their business. But having a succession plan in hand is useful as a just-in-case emergency contingency, even if you’re not planning to exit any time soon.

If you leave it until a health issue comes up and you need to sell, you’re not going to optimize your company’s value and you’re probably going to leave your family with a larger-than-expected tax bill. And that’s not to mention that the business will have a hard time continuing normal operations.

You started your business 30 years ago with a few family members and now you have a 100-employee company and your adult children are actively involved.

Mentoring, trust and a deep knowledge of the business have been the keys to a smooth transition from one generation to the next. One of the benefits of your children growing up around the business is learning the business from its patriarch. Seeing the business through their eyes, their values, work ethic and love of the business.

Starting from their high school years, your children can begin to learn every aspect of the family business. While these are invaluable lessons, higher education should be encouraged such as business, accounting & finance.

Learning the business from the ground up

Transition processes are some of the most important and delicate challenges in the life of an entrepreneurial business.

One thing that can make the transition process easier is to begin to hand major decision-making to the children gradually. The key is to let them problem-solve on their own. It’s important for them to learn from their mistakes while maintaining their confidence in making decisions.

Not every decision can be made by family

Family-run businesses face the same questions that most entrepreneurs have to face at a certain point: How to make sure to have the right management structure in place for growth? Consider engaging a management consultant for help. An outside consultant can help you make the difficult decisions necessary to grow your business.

Out of the process also flows the need to hire a controller—mainly to find ways to save on costs, develop departmental budgets and better understand margins. Consider introducing performance reviews for employees with a focus on developing their skills.

Most of all remember we all hope that our children will take over the company. But just because they share the last name doesn’t necessarily mean that they are the best for the job. They will have to prove that they are the best leaders for the company.

Diversification and financial management are key strategies

The recession of 2008-09 may have occurred nearly a decade ago, but it’s still a painful memory for many entrepreneurs. More recently, the decline in oil prices has caused a slowdown in producing regions that have hurt business owners.

Unfortunately, economic downturns are a fact of life when you’re running a business. But there are steps you can take now to prepare your business to weather a storm and emerge even stronger.

Entrepreneurs often know they should be prepared for tough times, but they don’t always take the necessary steps.

Here are five ways you can recession-proof your company.

1. Grow your customer base

It’s hard to overemphasize the importance of increasing the number of customers you have. According to a recent study, nearly one in six well-established businesses had encountered financial difficulty because of losing a single client. Very often, businesses are not prepared to deal with the unexpected loss of their biggest client or contract.

2. Focus on your finances

Solid financial management is vital for ensuring your company is ready to weather an economic downturn. Entrepreneurs need to have early warning systems to let them know when trouble is brewing. The numbers tell you the truth about your business and you need to embrace them.

Consider setting up a cash flow planner. To do so, use a spreadsheet to record projected revenues and expenses for the next 13 weeks and then update it each week. This allows you to get a handle on when payments from customers are expected versus when suppliers must be paid. You can then plan for periods of tight cash flow, coming projects and financing needs.

Consider setting up a financial dashboard, showing four or five key performance indicators on the financial health of your business.

3. Offer new products and services

It’s easy for business owners to get comfortable with the products or services that have been successful for them in the past. However, broadening your line-up may be the key to surviving during the next recession.

In fact, you may not even have to come up with something completely new. Instead, you might be able to repurpose your products for another market. For example, manufactured products used in the oil and gas sector could be effective in other areas with just a few changes. Research showed that having a range of products and service lines can be an important form of diversification.

4. Expand internationally

International expansion is another great way to diversify your business. If your sales dip in Canada, you may be able to make up the shortfall in markets with stronger growth.

Exporting opens up a lot of opportunities. Canada has cultural and economic ties with the U.S. and Western Europe, and our small and mid-sized businesses can often be very successful there. Those markets, in turn, can be a launching pad to higher-growth emerging markets.

5. Stress-test your business

As the last recession proved, some circumstances simply can’t be foreseen.

That’s why it’s important to run through various scenarios now, including how you’d handle a sharp drop in sales. While you’re at it, look at different crisis and disaster scenarios and put contingency plans in place to deal with them.

Look at things like: What happens if our input prices rise because of the weaker dollar. What if key people in your business were all of a sudden unable to come to work because of illness or a natural disaster? Unexpected developments can derail businesses.

Lessons learned

• Innovation counts—Successful businesses offer new products and services often and quickly adopt new technology.
• Get help—Networking, hiring consultants and setting up an advisory board are ways successful businesses get external advice.
• Map it out—Developing a strategic plan with specific targets will help to keep your business on track even as economic conditions change.
• Master financial management—Keeping tabs on your finances allows you to plan better, see trouble brewing and react quickly.