How Do I Model A Downturn In My Business?
In this issue…
Simple Profit Math to help model the downturn
374 words, total reading time about 2 minutes
Many of you applied for payroll protection last Friday. Having additional cash during these times of certainty should not be a bad thing.
But have you modeled the downturn and what it could do if revenue recede?
For you fans of Profit Math we usually see:
Gross Margin 55%
COMP (Payroll) 38% or more
Net Profit 7% or $70,000 per $1mil
But what if, Revenue recedes to 75%, margin declines 2% and collections become more difficult and the pace of new project advances slow as well?
What would a 20% reduction in payroll and a 10% reduction in expenses yield?
The savings of 7.6% on payroll (20% of 38% above) is $76,000 per million$ and 1.0% of expenses (10% of 10%) is $10K per mil.
The revenue hit will cost you (53% of $250K in lost GM) or $132,5000 plus (2% on the other $750,000 or $15,000), so the net effect is (-$132,500-$15,000 +$76,000+$10,000) or a $61,500 (6.15%) loss; taking the example business almost to breakeven.
Further, keep in mind, payroll reductions don't always happen immediately, if employees are terminated. 4 Day, 32-hour work weeks could get you to 20% fairly quick. If you pay for drivetime consider clocking in at/from the job (taking the trucks home). Getting 25 hours billed from 32-hour techs would be a new noble/effective goal. You may need to keep the parts runner.
Salaried people may be a bit more difficult based on the State laws. Using PTO does not save any money short term. See your local advisors for how to handle these situations.
Having a firm handle on the timing of near-term revenue is more critical than ever. Most companies can associate $1M in revenue with 5 to 8 active projects; a $5M company may have 40 to 60. So, a detailed week by week plan should not be impossible or too impractical to put together and adjust weekly. Be realistic; over-stuffing the expectations only works against you.
Hopefully this helps at a very high level. Meanwhile be proactive, understand your risks and cash positions. Happy to help if we can.