While certain sectors of our economy have shown signs of a gradual uptick, many, if not most, remain in a state of stagnation or recession.
Scott Rittenberg a partner with Habif, Arogeti & Wynne, LLP, points to three areas where owners can take control to better their chances for success in this, or any, environment: cash management, operational procedures and employment issues.
Many of these strategies are commonsense approaches to best practices, but they are often overlooked or put on a back burner as business owners and managers focus on day-to-day operations.
Smart Business spoke with Rittenberg about actions that family-owned and closely held businesses can take to improve their prospects during tough times.
If a business is currently experiencing a loss, what can the owners do to minimize that loss and have the cash necessary for continuing operations?
If a business had a down year, most likely it is sitting on a tax asset a net operating loss. Owners should file as early as possible to carry back losses and free up cash.
Owners should overcommunicate with their bank. Bankers do not like surprises. They expect revenue to be down in this environment. Set up a proactive meeting with the lender; do not wait for them to come to you. Now more than ever, businesses are partners as well as customers. Prepare forecasts using different realistic scenarios. Communicate early if there is danger of violating a covenant. Also, research how the bank is doing; their problems can become the business’s problems.
On the flip side, if the business is healthy, now is a good time to acquire a credit facility. While there may not have been a need for debt in the past, now is the time to view a line of credit as insurance.
Do whatever it takes to maximize cash flow. Stick to a strict payable schedule, no early payments. Work with vendors to try to negotiate more favorable terms with vendors. I’m sure they’d like to place more inventory. Offer to take more inventory with a guaranteed sale provision. Be prepared for vendors to require a personal guarantee on purchases. Negotiate vendor guarantees and consider doing the same with customers if the business is B2B.
Diligently manage receivables. Send out invoices as soon as possible, instead of waiting until the end of the month, and revise collection policy to become more proactive. Be sure that troubled customers keep current on payments. They can work on paying old invoices while not getting further behind. Consider converting old accounts receivable to a note receivable.
Where are the best areas to look for efficiencies in operational procedures?
Many of our clients have found significant savings by improving their procurement process. This usually involves using a consultant to evaluate and compare specific large expenditures to the market to determine if optimal pricing is being received. Oftentimes the savings are dramatic. Common areas to review are raw materials, freight and shipping, utilities and supplies. Usually, the fee for a study is a percentage of the savings.
Get rid of obsolete or bad inventory recognize the loss. Write off bad receivables.
Review job descriptions for duplications or inefficiencies. Be careful, though, there is still a need for segregation of certain duties and strong internal controls. Employees may be more tempted into inappropriate actions such as fraud during economic stress.
Depending on the industry, increase inquiries as to customers’ financial health and sustainability. Obviously, adjust credit terms accordingly. This is especially important for new customers, some of whom may have been cut off from their old suppliers for lack of payment or slow payment.
What would happen if a major customer were lost? Would the business have to cut back staff or reduce hours or production? Have a plan in place for the first 24 hours, 48 hours and the first week after the loss of a major customer.
How are vendors doing? Could their ability to supply inventory become an issue? Now may be the time to establish relationships with alternate vendors even at a less favorable price point.
Are there issues related to employment that business owners should be more aware of during this time?
If the business doesn’t have a relationship with an employment attorney, now would be the time to start one before executing any staffing decisions. A few hours of time evaluating procedures and policies on the front end may save a lot of heartache and expense on the back end.
If the business needs to reduce staff, owners should try to be creative with severance (assuming they’re in a financial position that allows). For example consider paying health insurance beyond the normal term. Little things may create good will. When times turn around, valuable former employees may be more willing to leave their next position and return. Be sure to check with an attorney before making any commitments.
Businesses can no longer tolerate ‘dead wood’ or underperforming family member employees. They may need to be removed from daily operations to save the business. Family members may still receive the benefits of ownership (when there are some) but not compensation for ‘services.’
Reduce overtime and benefits. Employees may be willing to do more in order to avoid reduction in base pay. Only cut pay as a last resort. Be cognizant of labor law issues, though, when employees are working more hours for the same pay.
This is probably the worst economic environment that most business owners have ever faced. However, like all other tough times, this recession will end. Those businesses that use this opportunity to improve their overall operations will be very well positioned for significant growth and profitability when better times return.