We often have clients contact us when times get tough. Sales have taken a dive and they aren’t prepared to weather the storm. They often don’t have sufficient working capital in place to cover all of their outgoings during the down turn and are out of options. These businesses are generally profitable but because of this they don’t prepare well or at all for the lower periods. Being prepared for the downs is key to the long-term survival of any business.
What we have noticed is that many business owners base their numbers on averages, but we know that volatility throws averages out the window leaving you and your business stranded. One, two or three months with below average turnover paired with steady expenses/overheads can cause havoc with your cash flow. The below average cash coming in is not sufficient to cover your average outgoings and you are left not being able to pay your creditors or worse your staff. You start to think perhaps it’s time to throw in the towel.
Now it’s not all doom and gloom. There is a way to plan for these periods of lower sales or unexpected expenses. We work closely with our clients to design strong businesses that are prepared for the challenges they may face and have appropriate working capital or a back up plan in place to weather the storm.
The key to understanding your businesses needs and being prepared is Volatility Analysis. Basically, we use your past data to analyze your average turnover, your high and your low points and more importantly your one, two and three standard deviation ranges from that average point. This provides us with more useable information around your low turnover range and therefore how much working capital you will need to cover a temporary down turn. We are able to see that over time the business is profitable but to smooth things over during the tough times you will need additional working capital.
Volatility analysis solves the problem by understanding the range in which your business operates not basing all decisions on averages. Having this knowledge will give you greater understanding and confidence that your business is equipped to get through a down turn in sales. You are able to make firmer decisions in your business because you are prepared for when times are not so great. Not having this knowledge leaves you open to being left without options in the short term even if overtime the business is a good one.
All businesses face ups and downs and if you want to prepare your business for both the good and not so good times get in touch and we can run through this volatility analysis with you.