A sound strategy can get you through today’s credit climate.
With the recent credit crisis, it’s important to consider how a sound strategy can help you navigate through turbulent times. We’ve collected the following tips from the AICPA (American Institute of Certified Public Accountants), to help you assess your current financial condition and start rethinking your business plan for the road ahead. And while these tips are geared to business owners, individuals can certainly benefit from many of them.
- Don’t panic. Try to step back and take a calm approach. To get a better sense of where you stand, begin by reviewing your cash position and anticipated cash needs. Are they in line with your personal or business’s short-term needs, goals and risk tolerance?
- Take a fresh look at your monthly income and expenses. Have you been meeting your budgeted projections? How much of a drop in revenues can your business withstand and for how long? What are your cash-flow needs for the next 90 to 120 days? Or 120 to 180 days? Do you have sufficient cash reserves for the next 30 to 60 days?Check with your lenders on the status of your credit lines. Are you in compliance with their terms? Will your bank renew their commitments at similar amounts, rates and terms?
Eliminate your reliance on credit by disciplining your spending. - Refocus on your balance sheet and how much credit you are extending to your customers. What are the terms of that credit?
- Address matters immediately if your credit lines are frozen or at their maximum limits. Consider meeting with vendors and working out a schedule of partial payments that would allow continued delivery of critical materials and supplies.
- Look into alternative types of financing. Consider loans on life insurance policies, loans from key customers that rely on your business for their materials and supplies, or loans from labor unions, local development agencies or the U.S. Small Business Administration.
- Keep an eye on your accounts receivable. Watch for new patterns of slow payments and follow up immediately. Review your largest and riskiest accounts to determine whether credit constraint or economic slowdown will affect their ability to pay you. Keep the receivables aging current.
- Manage accounts payable more closely. Consider forfeiting early-pay discounts to preserve cash that may be needed for critical items. Keep payables aging current at all times to manage your cash balance.
- Analyze your expenses and determine which ones can be controlled. Can you reduce spending to put less of a burden on your cash-flow needs? Ask your staff/team members to tighten spending wherever possible.
- If you’re a manufacturer, review inventory management practices for opportunities to reduce your on-hand inventory.
- If you’re a service company, make sure you’re capturing all billable hours and invoice your clients promptly. Have you billed all your contractual items? How about all your pass-through expenses, such as billable third-party services and travel expenses?
- Consider ways to pass your increased costs on to your customers. These may include fuel expenses, shipping costs, printing costs and other expenses you can’t control. Can you increase your fees? A slight increase might not bother your customers, but can help you in a major way.
- Check the safety of any cash deposits you have. The standard FDIC deposit insurance maximum is $250,000 per depositor. If you have more than $250,000 in any one bank, move the excess to another FDIC insured bank. Consider investments such as CDARs (Certificates of Deposit Account Registry) to spread the risk of short- to medium-term cash you may have invested in CDs. Check out the FDIC FAQ page for further details: http://www.fdic.gov/deposit/deposits/insured/basics.html
- Don’t engage in panic selling of your investments. Make sure your portfolio is diversified and in accordance with your risk tolerance.
- Come up with a plan NOW to respond to future declines in revenues, before they occur. Re-think your business strategies and update projections. Review your product/service lines to identify the most profitable items and determine how to leverage for future profit growth.
- Contact your good customers. Even casual discussions can lead to new business opportunities.
- Review all your insurance coverage, particularly any from companies with weak balance sheets. Be careful not to surrender a policy, as securing new coverage might require underwriting that can affect your coverage. Consider increasing deductibles to reduce premiums.
- Calm your employees’ fears about how this crisis will affect the company, their jobs and their retirement or other benefit plans to avoid speculation and gossip.
For help in understanding issues facing small business, turn to the CPA profession’s free Financial Literacy Web site for consumers at www.360financialliteracy.org. You’ll find tools and tips to help you make important decisions for your business and your own personal financial planning needs.
If you’re running a small business, keep in mind that you DO have advantages over large companies:
- Small businesses have greater flexibility and can more easily adjust to changes in the economy than their larger counterparts.
- Small business owners can use the recent crisis as an opportunity to buckle down, refocus, assess and make their company more financially sound, disciplined and less reliant on credit.
Remember that you’re not alone. We know and understand your business and the challenges you face, and we can work with you to navigate these turbulent times.
Our financial articles are presented by Honeck O’Toole, Maine-based certified public accountants. If you ever have questions about your finances, please email us or call 207-774-0882.