Are you ready? Featured

7:00pm EDT December 26, 2009

It may seem like wishful thinking, but business owners and executives need to start planning how they’ll handle increasing revenue to avoid problems when the economy rebounds.

“Economic times have been very difficult over the past 18 months, but there is a light at the end of the tunnel,” says David Janus, the president and CEO of FirstMerit Bank’s Cleveland region.

The economy will eventually rebound, and when it does, will your company have the necessary working capital and internal cash flow to grow again?

Smart Business spoke to Janus about how to ensure your company is ready to take advantage when the economic upturn hits.

How can you survive today while positioning yourself for when the economy turns around?

Many companies, although historically healthy, have experienced extreme sales declines and many other challenges to their businesses over the past year. To survive in this new challenging environment, these companies have reacted by using a three-step approach.

The first step is aggressively reducing expenses. The second is focusing on the collection of accounts receivable. The third step is stretching their vendors and/or extending payables.

All of these actions have the ability to create an immediate positive effect on cash flow. However, none of these strategies can be implemented forever or provide long-term success for a business. In my experience, companies have an amazing ability to cut costs in order to survive in the short term.

What pitfalls should companies be aware of as the economy begins to turn around?

What many owners do not realize is that companies weakened by the recession have a high risk of failure when the economy rebounds and their sales start increasing again. Revenues that increase quickly require cash to fund receivable and inventory increases. Businesses that carry substantial inventory, such as manufacturers and distributors, will be affected the most dramatically, but all companies that are growing will use cash. It is the responsibility of the business owner and his or her financial team to assess the company’s cash needs for the upcoming year. Your banker can help with this.

What needs to be done to assess a business’s upcoming cash needs?

There are five key items that a business needs to examine:

  • Collection time period for receivables
  • Collectability of those receivables
  • Payment terms for suppliers
  • Actual expenses paid
  • Access to additional capital or line of credit to cover any potential cash shortfalls

These factors will determine if your company will have the access to liquidity it needs to fund additional revenues, which will become necessary when the economy rebounds.

What should business owners do next?

There are a few different paths I can recommend for business owners or executives planning for the future. First, they should craft two separate sets of cash flow projections for their company.

One set of projections should have flat revenues as I think sales have bottomed out but will remain weak for some time to come. These projections will demonstrate whether the expense changes made to the business are sustainable. For instance, has your company adjusted its expense structure enough to sustain itself with lower revenues for the foreseeable future? This illuminates a major cash flow issue: Has your company survived based on short-term fixes, such as stretching payables to generate cash? With payments now due and no increase in sales, getting caught up may not be feasible.

A second set of projections should show revenue increases and the corresponding effect of those increases on your cash flow.

Depending on the business, new orders mean additional inventory or staffing to meet the production levels. Both of these issues require upfront cash with the resulting cash inflow not seen for possibly 30 to 90 days or more. Consequently, the owners or executives must consider how much additional cash will be needed to fund the expenditures and what sources are available.

How can businesses fund cash shortfalls?

Shortfalls can be filled from three sources, depending on the amount of the shortfall and expected duration.

First, the bank can help fill the gap, provided there is sufficient collateral from either the working capital assets or possibly excess value in fixed assets. Second, there are mezzanine providers that can provide bridge financing on a short-term basis to get the company through the cash crunch. Finally, the owner may be required to provide personal liquidity to meet the needs of the business.

Where can businesses turn for help?

If you need help calculating your cash flow, you should meet with your accounting or banking advisers, any of whom should be willing to provide assistance. A rolling six-month cash projection that effectively encompasses a company’s cash cycle is an exceptional tool for this type of planning.

Once a company has the information from its cash flow projections, it should meet with its banker and develop a plan to fund a projected liquidity shortfall if one exists. Banks are best able to help in these situations when all of the potential factors are identified and brought forward, giving all parties full knowledge of a situation. Surprises are a worst enemy for both client and bank. A company’s foresight in this regard exhibits management maturity and planning abilities. The time to do this is now.

DAVID JANUS is the president and CEO of FirstMerit Bank’s Cleveland region. Reach him at david.janus@firstmerit.com or (216) 694-5658.