The question of when businesses should reopen in the wake of the COVID-19 crisis is, at its core, a financial one. While each state has issued guidance on the reopening process, it’s ultimately a question that every business owner will have to grapple with independently, taking their specific circumstances into account.
If you are in a state or regions where restrictions have been lifted and businesses around you are making preparations to reopen, you’ve got some tough decisions ahead of you. Reopening does not guarantee your sales will go back to their former state before shelter-in-place orders were issued. In fact, it could mean that you’ll be bringing in significantly less than before, which leads every business owner to ask themselves the question: Is it a better financial decision for me to reopen now or to stay closed a little longer?
The answer, of course, depends on your line of work, the financial assistance you’ve received so far, your team, and your location. However, there are some common factors that you can look at to help you make the tough decision.
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Can I Afford to Open? Look at Fixed & Variable Costs
Most states that have issued reopening guidelines have put strict limits in place for physical stores and restaurants. Businesses that reopen must be able to ensure that physical distancing guidelines are followed, meaning that they may need to plan for significantly fewer patrons inside their business at any one time.
This may mean operating at 20-25% capacity for a while.
Much lower physical capacity means a hit to revenue (excluding any creative ideas for delivery, pick-up, or online services). If revenue drops, the question becomes whether you can afford to cover the expenses that come with a physical storefront. Some expenses depend on how many customers you have, while others will be constant whether you serve 50 customers or two on a given day.
Let’s look at a yoga studio as an example.
Let’s imagine Yoga Yoga Yoga is told they’re free to reopen but they must maintain a distance of six feet between attendees and run at 25% capacity. The owner has some math she can do to help make this decision.
First, she should calculate her anticipated revenue. If she can normally fit 32 people in one class, here’s how she can find her expected revenue at a more limited capacity, in this case 25%.
32 Attendees x 0.25 Limited Capacity = 8 Attendees per Class at Limited Capacity
If each class costs attendees $20 and she hosts five classes a day, she can expect revenue in the range of $800.
8 Attendees x $20 per Attendee per Class x 5 Classes per Day = $800 per Day in Revenue
Knowing what her revenue might be in this best-case scenario, the owner can now begin to calculate her possible expenses. To do this, she’ll break down her fixed and variable costs.
How to Find Variable Costs
Variable costs are those that go up or down depending on how much you sell. If you make chairs for a living, the more you make, the more lumber you need to buy.
Or, in Yoga Yoga Yoga’s case, the more instructors they’ll need to pay. As a yoga studio, they likely have very few variable costs.
For other business types, it’s helpful to look at past income statements to see what past cost of sales amounts were. If they’re relatively consistent, you might divide that number by four (or your 25% capacity limit) and have a strong estimate.
If COGS doesn’t reveal much, that’s okay, too. For many businesses that don’t produce physical products, it can be particularly challenging to calculate. If that’s the case, open up your accounting file or bank account and look through the past few months of expenses. Start a spreadsheet of everything that looks like a variable cost and note how often you make those purchases. Once you’ve found your average monthly totals, simply divide by your limited capacity rate.
How to Find Fixed Costs
Unlike variable costs, which go up or down depending on sales volume, fixed costs are steady no matter what revenue is like.
Yoga Yoga Yoga’s fixed costs, for example, might include building rent and utilities.
Fixed costs also live on the income statement. They’re not cleanly broken out, but business owners can look at the operating expenses section as a guide.
Like before, if you’re unsure looking at your income statement, start a new spreadsheet and begin to track past expenses that seem like fixed costs. Look for any payments that are set up to auto-draft from your accounts.
While we divided our variable costs by four to account for the lower capacity limits, you won’t divide fixed costs at all since they aren’t dependent on the number of customers served.
Of course, if you’re able to cut any unnecessary fixed costs, now is the time to do it. Maybe you’ve been trying out a new software subscription that you’re not sold on. Maybe you’ve been paying for a premium music subscription. If there are ways to cut, do it. And leave those expenses out of your calculations.
Don’t Forget to Add New Expenses
So far we’ve focused on expenses you pay normally. But right now, it’s anything but business as usual.
All guidelines for states that have begun to reopen include guidance for sanitizing your storefront. As you start to record your regular transactions, don’t forget to factor in the new expenses you’ll need to pay in order to stay compliant with hygiene guidelines.
In many cases, you’ll need to sanitize your storefront every day. Will this cut into your open hours? Will your staff handle that cleaning, or will you hire a cleaning service? Will you increase frequency with an existing cleaning service.
This may require requesting some quotes from cleaning businesses and trying out a few scenarios.
Do the Math: What Can You Afford?
Businesses with already slim margins may find that limited capacity leaves them so far into the red that it would do more harm than good to reopen. The higher your fixed costs, the more difficult it will be to break even with lower-than-normal revenue.
If you find your business in the black, that’s great! You might be in a good position to reopen soon. Before doing that, make sure to calculate your worst-case scenario, too. What if your customers aren’t ready to come back? What’s the minimum revenue you need to stay in the black? And how many sales or customers will it take to get there?
This will help you track how you’re doing after reopening and make adjustments to your marketing strategy or overall plans as you go.
Burn Rate & Cash Runway: Two Metrics That Are Usually Reserved for Startups
For many businesses, there may not be a clear path to profit in these times, which leaves them with another calculation to make—how long can I afford to lose money? Will I lose less money each month by opening than if I remained closed? It’s a rock-and-a-hard-place situation, unfortunately.
To find this out, there are two metrics you can look at: burn rate and cash runway. Here’s what they mean broadly.
Burn Rate: The average rate at which a business loses money each month.
Cash Runway: How long a business can continue to operate at their current burn rate before running out of cash.
These are metrics that venture-backed startups are accustomed to calculating because they’re expected to invest more in growing their business than they take in through revenue. These metrics help them pace their spending and know when it’s time to begin fundraising again. But for small businesses, operating at a loss for a long period of time is never intentional.
In this uncertain time when you’re not sure how long you might be operating at a loss, these metrics will help you plan for the future. Let’s start with burn rate.
How to Calculate Burn Rate
Burn rate is intended to show your average losses over a period of time. The simple way to do this is to subtract how much cash you have now from the cash you had at the start of the period and then divide by the number of months between them.
Burn Rate = (Starting Balance – Ending Balance) / # Months
If you had $50,000 in cash in January and are down to $38,000 by the end of March, your burn rate would be $4,000 per month.
($50,000 – $38,000) / 3 Months = $4,000
This way of calculating your burn rate may not be particularly helpful right now since your losses in recent months may not reflect your losses after reopening (but we do have a calculator for it if you’d like to test it out). Therefore, it’s probably more helpful to run a few burn rate scenarios.
Use the numbers you found after adding up your fixed and variable costs and comparing them to your anticipated revenue. Compare that amount to what you have been losing so far with your doors closed. Which one is higher?
How to Calculate Cash Runway
Once you’ve calculated your burn rate scenarios, you can calculate your potential cash runways. Your runway tells you how long you can operate before running out of cash, assuming you keep losing money at the same rate.
Cash Runway = Current Cash Balance / Burn Rate
Let’s continue with the example above. If you have $38,000 in cash and are losing $4,000 per month, your runway would be 9.5 months, meaning you could operate at this level of losses each month for a fair amount of time.
Go ahead and calculate your runway for a few scenarios. If you kept your physical storefront closed, how long could you operate? If you open, how long could you operate?
We get that the bigger number doesn’t always win here. There are plenty of other factors involved that might impact your decision to reopen, and you might be looking for an option that makes your runway long enough. As we said before, deciding to reopen is something that every business owner will grapple with independently, taking the many factors of their unique business into account.
However, calculating these metrics can give you some solid ground to stand on in uncertain times and a framework around which you can make your decisions. We recommend coming back to these metrics as circumstances change, running new scarios through them as you need.
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Other Considerations to Keep in Mind
Speaking of the several other factors that business owners will need to contend with, here are a few that we have heard from small businesses lately that might help you to decide when reopening is right for you.
- Make sure there are no breaks in your supply chain. If you rely on other businesses for supplies, check in with them to make sure they haven’t hit any snags. If warehouses are closed or moving more slowly than usual, this could have an impact on your ability to open.
- Talk to your employees. Are you and your team on the same page about reopening? Are they comfortable with it? Bear in mind that some employees may have conditions that make them more vulnerable. Ask about their comfort level and remember to respect their privacy.
- Don’t forget about unemployment. Remember that if you’ve laid off any employees, they are obligated to accept any work they’re offered. If you ask them to come back at a significantly reduced rate, you could do more harm than good. Be mindful of them and what they’ll need to get by.
- Talk to your customers. Is there enough demand for your business? Send a survey to customers or talk to some of your most loyal patrons to see how they feel.
- Review the CDC and local guidelines. Are you able to comply with all the guidelines? Do you know how you’ll enforce them? Review the guidelines for your region carefully and make sure you can follow them to the letter.
Deciding whether or not to reopen—or how to reopen—is not easy. These are unprecedented times, and every business will need to make the best decisions for themselves. While we certainly wish that there were more support for small businesses, we understand that there’s a very real balancing act going on between bringing in enough revenue to keep businesses afloat and guaranteeing safety by keeping doors closed.
We’re keeping a close eye on every new development affecting small business and updating our resources regularly. Check back for more information as news develops. As always, we’re rooting for you.