Planning for a Black Swan

COVID-19 caught the whole world by surprise.  As well as the human tragedy, the financials consequences of the Pandemic will stay with us for years to come.  Such an event is called a Black Swan.  

First identified before the 2008 financial crash by finance professor, writer and former Wall Street trader Nassim Nicholas Taleb, Black Swan events are unpredictable and can have far reaching, catastrophic consequences.  However, he went on to claim that ultimately, they can serve to strengthen systems against other future unpredictable occurrences.  But how can franchisees plan to strengthen their businesses and mitigate risks for the future following this Black Swan?

It’s important to have a clear overview of your business and then put plans in place.  You need a clear snapshot of your current situation to know how heavily the business is geared, how much you owe and how much your business is worth.  The strength of assets and investment need to be tied in.  In the good times if you have too much debt then, when the economy shifts, what then?

The best way to get a handle on the numbers right now is through a set of management accounts.  Normal year end accounts can be up to 18 months out of date by the time they are filed and so management accounts which provide the latest information every month are very useful to make paint an accurate picture of the here and now.

Having this financial information at your fingertips enables you to make informed decisions.  If you’ve had a good month, you know about it, you can see which marketing promotions are yielding the most leads and repeat the positive activities.  You will also know quickly if there is a downward trend and you can take action.

In the current climate, you may need to make some calculated decisions.  For example if you need to run your franchise at a loss in the short term to keep engaged with 50% of your clients while business comes back on line, you need to know how much this will this cost.  Realistically, how long can you do this for?  In this way, management accounts can enable you to model scenarios and plan for an uncertain future. 

Having a handle on the financials also means you can react immediately as situations change.  This agile approach may mean you can negotiate preferential rent on a new premises that becomes available or invest in new equipment while it’s at a reduced price.

As an accountancy and business advisory firm, the most common mistake we see from franchisees is not having management accounts but sometimes not having a business plan at all!  

New franchisees need a solid business plan to attract funding but also to serve as a roadmap for the development of your franchise.  But this is also applicable as your franchise develops.

A good plan identifies goals and milestones so you can be sure you are on-track within certain timeframes.  It enables you to take action early if targets are not being reached.  This may mean changing your marketing strategy or focusing on a more profitable product or service.   The important point is by putting ideas in writing you have a reference to go back to and compare progress with forecasts.  Honing the plan as your business develops results in more accurate forecasting for the future and so you can be more certain of when you can invest in new van or take on more staff for example. 

Usinggraphs and diagrams which can help put facts and figures into a good format, demonstrating how you can back-up your forecasts.  One way to mitigate future risk is to be conservative.  Everyone says they are conservative with their estimates, however, in our experience most people aren’t!   

Be realistic and honest with yourself.  In addition, build in contingencies to allow for unseasonal or unexpected occurrences.  It will never hurt to be above plan, but it will hurt to be below!

It’s the same for timeframes.  Keep in mind that it takes time to get a new business off the ground.  There will be unforeseen circumstances.  You will find some elements more challenging and more time consuming than others.  Therefore, ensuring you have plenty of time to reach your break-even point will mean you will calculate sufficient cash flow to keep the franchise going comfortably until then.

If you overstate your financials and don’t have enough working capital to make it through the downward curve, you will find yourself immediately on the backfoot and potential faced with the option of whether to continue.

A business plan is made up of assumptions and a myriad of variables, any one of which if slightly misjudged could have disastrous effects on your business performance.   Therefore, proof-read, justify costs, know your breakeven and pinch points.  Get a second opinion as often new franchisees can be too close to see mistakes.

The business plan is a working roadmap for the future.  So, once it’s completed, refer to it often!  Use the information to check you are progressing towards your goals.  If not, get help before the challenge becomes a real problem.

My final point is don’t be afraid to ask for help.  Most new franchisees have never written a business plan before and so it makes logical sense to talk to people who have a great degree of experience in planning.  It also takes a significant outlay in time/cost to create a good, workable business plan so don’t put your goals in jeopardy by not investing in the professional help needed to create a realistic and attainable plan.  The success of your franchise could depend on it!

At d&t we have worked with many franchisors and franchisees over the years and our experienced accountants have needed to outline some flaws in some of their business models which had previously been hidden!   We have also been able to help many business owners on the road to success through creating a workable plan which takes into account the many variables faced by individuals on their journey in franchising.  

It is never possible for a new or even more experienced franchisee to understand all the implications and optimum configurations for things like vehicle finance, VAT thresholds, asset finance, company structures, tax etc, so talk to people who do!  Starting and running a business is never free of risk, particularly in the current climate.  However, by investing a small amount in professional advice at the, from those who have seen the effects that unpredictable events can have on franchises and how they are coping, will offer the best chance for a successful outcome for you and your business in the future.  

Not all events are predictable but if we can anticipate and prepare through good modelling and planning, we have the best chance of swimming with the next Black Swan not against it.