Just a little patience Featured

7:00pm EDT November 25, 2007

Business moves in cycles. Into late 2007, we saw a volatile stock market, good interest rates and a generally good economy. However, there are signs — the increasing national deficit, a slowing in housing and auto markets, and the consumer credit card crunch — that indicate we are moving into an economic slowdown.

Smart Business spoke with Dennis Gramann, a vice president in the business banking group at Fifth Third Bank in Cincinnati, about how an economic slowdown can present opportunities for the alert business manager.

Is it a good time to buy capital goods?

A company’s ability to purchase capital goods is dependent on the strength of its balance sheet. Companies with sufficient working capital and a strong debt to worth ratio have capacity to take on additional debt and allow for capital expenditures. The opposite is true for companies with a weak balance sheet. They will look to sell assets to reduce debt to improve cash flow and improve margins. They may even be looking for someone to acquire the business. There are always winners and losers in an economic downturn. Companies who control expenses, watch margins and make smart capital investments prior to downturns are primed for expansion when the economy turns for the better. They have greater flexibility and capabilities to grow their businesses.

Is it currently a good time to sell commercial real estate?

Anyone who reads the paper sees that the residential real estate market is hurting. It is not a great time to sell homes. But the commercial market has shown remarkable stability so far. Of course, the local market dictates the situation. There are areas of expansion and growth that will drive the commercial market values upward and produce strong sales activity.

What about interest rates?

The belief here is that the prime rate may drop another quarter at the end of the year.

We hope that will spur some economic incentive for business growth. Long-term rates have not had any dramatic change in the recent past. You might see short-term rates go down even more depending on the Fed’s view of the economy and inflation. Overall, long-term rates are still fairly low.

How can you keep your best workers happy?

If you look at the business models today, the majority of companies are going to performance-based pay. They offer a good base salary with incentives and bonuses based on what the employee brings in the door or contributes to the company’s bottom line. It’s always a good idea to pay good people for what they contribute. But, there are other areas to examine. Look at all of your expenses — employee expenses, insurance costs and other overhead expenses. Go to your vendors to get materials costs down. Make sure that all of your customer relationships are profitable ones. This process can make for difficult decisions , but it is necessary to allow the company to be a viable business.

What advice are you giving customers about planning for sales growth?

The place to start is to look at your niche market and see what successes and failures other businesses in that market have had. If you are in manufacturing and fabrication in the auto business, you might want to revisit your projections. In other industries, the economy may be going strong. Your individual industry is the paramount concern when planning sales growth. But good companies always find ways to go forward. Talk to your banker and to your accountant. They can benchmark your business against others in your industry. Look at your current ratio, working capital, debt-to-worth. If you are in line with other companies in your field, you’ll likely come through okay. If you are not, work with your banker and accountant to see what changes can be made to improve your company’s financial strength.

Do slowdowns mean the time is right to buy competitors out?

The answer is yes. There could be some excellent buys with very little premium. This might also be a good time to look at increasing market share, since the competition could be priced out of the market. But you can’t stay stagnant — look for diversification.

Is it a good time to refinance lines of credit?

Lines of credit are risk-based and based on a company’s strength. If you think you deserve a better rate, go ahead and ask for it. But it is not a given.

What other opportunities should a manager look for during a downturn?

Look at opportunities in other areas related to your basic business. You might be able to use your current equipment to expand into another product line. Diversify. There will be opportunities when other companies fall by the wayside. Smaller businesses can do only a little of this, larger ones more. Or, partner with someone in another industry with similar processes or process requirements. Diversification will help maintain the revenue stream in a downturn.

DENNIS GRAMANN is a vice president in the business banking group at FifthThird Bank. Reach him at dennis.gramann@53.com.