Disclaimer – For this piece I consulted with a business advisor who has requested anonymity. His background, however, includes more than 30 years in the international finance world and nearly 10 years as the president of a local bank where he worked daily with small business entrepreneurs. He has also been a financial advisor and consultant to numerous small businesses around the country as well as being on the board of several nonprofits. He has personally been critical in helping me get my own small business up and running and I trust his input implicitly.
If you think we might be headed for another recession you’re not alone. Last week it was reported in the Wall Street Journal that the Small Business Administration finds that 30% of small business owners expect that we’ll be in a full-fledged recession within the next twelve months. This is up drastically from 13% of small business owners who felt that way when asked back in December 2010. Over the past few days we’ve been talking about what steps small business owners can take to prepare their businesses for an economic downturn. Today we’ll look at the Balance Sheet but, if you haven’t already, be sure to check out the earlier posts covering Income Statement expenses and Revenue.
Balance Sheet -Assets
- Accounts Receivable- I assume that most readers of this blog do not have Accounts Receivable (A/R), as your sales are either cash or debit/credit card. But in case you do generate accounts receivable in your normal course of business, the advice is simple- watch them like a hawk! You’ve sold goods or services on credit terms, but make no mistake, you’re an unsecured creditor on their books. Putting it another way, you are one of their bankers as you’re providing them with working capital. If you see payment terms not being adhered to act quickly to secure your payment as something bad may be happening in their business. You need to have a bankers’ hat on when you’re looking at your accounts receivable. Enough said.
- Inventory-I can’t say enough about how important inventory management is. It’s important all the time, but even more so when economic times are tough and consumers are feeling great financial pressure. As consumers are deleveraging, and facing lower levels of disposable income, they’re essentially battening down their own hatches. As a consequence you have to be very mindful of how your inventory is moving. Again, it’s difficult to generalize given the range of retailers who might be reading this blog. If you’re in the business of baked products, you’re lucky as the main inventory consists of butter, dairy products, flour, etc which a) can be readily ordered on short notice and b) can be reconfigured to another type of baked product if something isn’t selling. You’re main worry is loss through waste/spoilage, or unsalable product, although day-old and 2 day-old sale items will probably move the latter off the shelf.
- With other types of retailers, e.g. apparel or accessories, of if your food business has packaging costs that make up a signficant part of your product costs, the problem of inventory management in a weak economy and with a weak consumer can be more difficult. First, the cost of inventory can be significant, and this usually requires higher level of working capital to finance the inventory. Orders for apparel inventory usually has to be placed months in advance, with payment made, or 30Net terms offered, from time of shipment. Retailers in this line of business have to anticipate how the economic problems will translate into their customers’ buying behavior, when the new inventory arrives. This is a tough business requiring some foresight and best guesstimates and there’s little advice I can offer other than to try to pare down your inventory to those items or product categories that sell well, perhaps consider a more “value” line-up, vs high fashion (e.g. high cost) and in all cases, if some items aren’t selling, get rid of them through “sales”, as fast as your can, and pay off the credit card debt that financed it. Keeping stale or dead inventory on hand, is…..deadly. Another thing you can do is look at your Inventory Days-On-Hand, for each product category. That will tell you how fast some of your categories are turning over.
Just remember, if you can cut your inventory by 10% or more, given the weaker economic outlook, think of the impact that has on your working capital needs. And it may not be cutting, per se, it may mean changing the mix of your inventory to be in sync with a more value oriented shopper.
- Accounts Payable- These would be your suppliers who offer you credit terms. Given the scarcity of bank financing these days, treat your suppliers like gold, and try to convince any who are not yet providing credit terms, to do so. Or find others who will. Free financing through credit terms is far better than paying 15%-24% if the order is charged to your business credit card upon shipment.
- Credit Cards payable- the bane of most small businesses. What can I say, other than to keep them as low as possible, paying down what you can, when you can, never missing even a “minimum” payment and keep your finance charges as low as possible. I personally hate credit cards.
- Bank loans or lines of credit- If you haven’t developed a strong communication line with your banker, do so. You don’t want to limit your communication to annual visits at the time the line is up for renewal. I know of many retailers who sit down with their bankers’ on a quarterly or semi-annual basis, in order to keep them informed of how things are going. Your banker isn’t stupid. He see’s every day, the impact of the economy on his customers, and if he’s doing his job well, he may be able to help you restructure a bank loan to better fit your evolving cash flows. It’s in both your interests to have a properly structured loan. See if your banker will consider a lower rate, as banks have benefited from lower funding costs since the financial meltdown. It never hurts to ask.
The posts of the last few days are just a few ideas that come to mind but sinc eyou know your business best, you’ll probably come up with many more. But leave no expense “stone” unturned. Analyze everything!