Our very own Dave Saunders chats to Auto Channel from the point of view of a workshop or small-to-medium automotive business. You can check out the full issue of Auto Channel here
Businesses shut during lockdown are under a strain they were never designed to withstand. Auto Channel contacted business consultant Aro Advisers to help point businesses in the right direction.
Our income has taken a hammering and so has our bank balance, what can we do?
Most business owners worry about making a profit – and you should. If you can’t make a profit over the medium term, your business isn’t viable, and that’s a very bad thing. However, it isn’t lack of profit that kills a business, it’s a lack of cash. Cash is king – it’s the equivalent of oxygen for business – you can’t last for too long without it. If you don’t have a buffer squirreled away for a rainy day, look at raising some finance (i.e. bank loan) or taking a more “hands on” approach to cashflow management.
If you’re wondering what the “hand’s on” approach is, it is negotiating better payment terms with suppliers, haggling for a rent reduction, examining all of your costs very closely (which you probably should be doing anyway) and making sure you get paid quickly.
I think we need to cut costs, where should we start?
I often suggest using a process of elimination; rather than thinking about where you can cut costs, think about where you really shouldn’t cut costs first, then attack everything else. There are 2 things that really grind my gears when people look to cut costs to help get a business back into the black. The first is when they reduce the value of what it is that they are selling. For example, if you were offering tyres and you substitute good quality tyres for cheaper quality ones but continued to charge the same prices, there is a good chance you will piss off your customer base – not a long term winning strategy.
The second thing that I often see is businesses cut back on their advertising budget – even when it is working. Unless you’ve got more work than you can handle OR it is clear that your advertising isn’t working, cutting your advertising spend is about as effective as putting less petrol in your car to achieve better mileage, it’s not going to work.
However, I often see businesses, over time, build up lots of bad spending habits. Money leaks out of all sorts of places. So, the first thing I would do is go through a Cash Flow Statement or a Profit or Loss Statement in your accounting software and see where all of your hard-earned money is going out. Line by line.
The government loans that are on offer, are they a good idea and how much can I get?
Much of what the government has released has been a bit of a moving target, it has evolved very quickly based on feedback from businesses, so it is quite possible that the Small Business Cashflow Loan scheme will evolve also. But as of right now, this is the situation: Businesses that the IRD considers ‘viable’ and have up to 50 staff can use the scheme. 0% interest is charged on the first year, then 3% per annum after that with no mandatory payments during the first two years. The amount you can borrow depends on your size. You can borrow up to $10,000 plus and additional $1,800 per full time equivalent employee. This means if it’s just you in your shop, you can borrow $10,000 + $1,800 = $11,800. If you have 5 staff, you can borrow $10,000 + 5 X $1,800 = $19,000. If you have 50 staff, you can borrow $10,000 + 50 X $1,800 = $100,000. At the moment, applications are open until the 12th of June.
If that’s how much you can borrow, is it a good idea? Most businesses carry some debt, and almost all of it will be at a higher interest rate and have stricter repayment terms, so these loans do look reasonably appealing. However, the money will still need to be paid back and IRD has way more collection powers than most other lenders. This isn’t free money, so if you do borrow it, use it wisely.
Lockdown, the extension for WOF’s and customers spending less is reducing our income, what should we do?
Boy, big question. Let’s start by looking at your costs, so go back a couple of questions and start there. Next up comes a very fundamental question: should you continue to operate in a similar way but focusing on being more efficient, or should you operate a different way? We will come back to this in a second, a couple more questions to work through first.
Tougher times are a good time to assess: what products or services do you make the best margin on? The reality is that most businesses don’t have a clear picture. Perhaps you do really well out of scheduled servicing but make very little on wheel alignments – what should you be focusing on? Obviously, scheduled servicing. What we are really talking about here is the very foundation blocks of your business model. Focus on what is best for your business, so start by assessing your margins on all your services and then orientate your shop to do more of that work.
Back to the first question. Is there something that your shop can offer that is recognisably different to others? Or can you deliver it in a different way? For example, when McDonalds first came along, people in the restaurant scoffed at the idea of a self-service restaurant. But it seems to have worked out pretty well for them. A more relevant example (but also from the US of A) might be Wrench – an innovative approach to mobile mechanics. Part of what they offer is fixed price work, online quotes and booking from an app. Despite being a young company, they now operate in more cities than we have in NZ.
If you’re really clear on which services you make money and you know what your business model should be, it’s now time to promote and grow your customer base. This DOESN’T mean discounting or cutting your price. It is very rare that the cheapest are also the most successful!
None of these steps are quick or easy, but if you want to come out the other side of this in front, putting some hard work in now will pay off.
If it becomes necessary, how do I make staff redundant?
Making decisions about a member of our teams’ future employment is never fun and is something that shouldn’t be rushed. But it is inevitable that some businesses are going to face a reduced workload and may have to look at all their options. Redundancy is the result of a process called restructuring. Restructuring is the process of exploring all options and inviting input from your staff. Too often, business owners jump to the conclusion and decide to make staff redundant, but if you don’t follow the correct process a) you might miss out on some opportunities or valuable input from your team and b) you are at serious risk of being on the wrong end of a personal grievance.
If you think you need to make some significant changes in your business that could result in roles changing or being removed, it’s worth seeking some professional advice. If that’s a bit hard to do, at the very least, make sure you understand and follow the correct process. It can be found here: https://www.business.govt.nz/hiring-and-managing/getting-the-best-from-people/team-restructuring/
If it is evident that you need to go down this road, don’t mess about, make a start because it might take some time to work through properly. While it can be a painful process, if the survival of your business is at stake, it’s worth getting on with it. One final point on this, it seems that a lot of business owners believe that because of covid-19, their legal obligations to their employees no longer apply. This isn’t the case. Word on the street is that already, there are a number of employers who are going to get a call up to appear in front of the Employment Relations Authority because of how they have treated staff during lockdown. Don’t be one of them.
What should we be doing right now?
There are three things I would encourage any business to do at the moment:
1) build a buffer. There is nothing like having a little more gas in the tank than you need to help you sleep at night. Right now, having access to a little bit of extra cash will make the difference during any lean months, so if at all possible, build a buffer. The next point will help with this.
2) keep costs in check. Now is the time to be ‘fiscally prudent’. This doesn’t mean not paying your bills or unreasonably screwing people down. It means being very considered about spending, not spending on anything that isn’t absolutely necessary, and shopping around to make sure you’re getting value for money
3) get work through the door. What are some advertising or promotional avenues that are either cheap or offer excellent returns and are quick? If you know some of your customers are going to disappear, some concerted effort needs to go into replacing them. Coming out the other side of this downturn will be the time that market share will change the most. Do you want to be on the losing side or the winning side?
Dave Saunders advises and coaches small to medium businesses around New Zealand. To get in touch email dave.saunders@aroadvisers.com