In tough economic times, defining your financial risks is a superpower.
Identifying your financial risks and implementing mitigation strategies is key to surviving economic downturns. After all, if you keep doing what you’ve always done, you won’t keep getting what you’ve always got – you’ll get less.
Everyone is feeling the pinch. Businesses are hit with a double whammy, being impacted by inflation and increases in supply chain costs, as well as the tightening of consumer belts. While these are out of your control, you can take steps to control the impact this has on your business.
Understanding key financial drivers
It’s obvious that a drop in sales reduces your profit and cashflow, but do you know just how much impact it will have? Even if your sales stay the same, what will happen to your profit and cashflow as expenses increase?
One reason sales can drop is due to the loss of regular customers. For example, if your sales are $1,250,000 and your customer retention rate drops from 75% to 65%, that alone would reduce your cash by $39,600 and your profit by $55,000. On top of that, what would happen if your costs also increased? It’s guaranteed in the current inflationary economy.
If your sales stay the same and expenses increase by 5%, your cash would reduce by $18,000 and profit by $25,000. Combine that with the 10% drop in your customer retention rate and it has now cost your company $57,600 in cash and reduced your profit by $80,000 – scary!
You may be shocked at the impact even a slight drop in sales and a rise in expenses can have on profit and cash. You’re an expert in doing what your business does, but not understanding and monitoring the key financial drivers in your business could quickly see your business losing money. Retaining your existing customers and keeping a close eye on your expenses is essential to maintaining or increasing your cash and profit.
How might your business be affected?
We can run your numbers through our Value Gap Calculator to show you the impact a drop in sales, increase in expenses, or reduction in cashflow could have on your business. We’ll help you identify the areas where you can make small changes to get quick wins that will positively impact your results and protect your cashflow and profit.
If you’re worried about the financial risks in your business and how these could impact your bottom line and cash in your bank, get in touch to find out more about our Value Gap Calculator!
