Cash Flow Crisis

Don Sadler

October 14, 2008

T he financial crisis that has rocked Wall Street over the past few weeks is having a very real impact on Main Street as well, especially on small businesses that need access to capital.

As the capacity of banks to lend money shrivels up, it has become much harder for businesses to borrow money. "It has always been difficult for small businesses to access capital, but now it's virtually impossible," says Marilyn Landis, a former commercial lender who is now the president of Basic Business Concepts, Inc. and chairperson of the National Small Business Association, a Washington, D.C.-based advocacy group that represents more than 150,000 companies nationwide.

"Growing, dynamic businesses need funding to leverage growth and take advantage of opportunities, but without access to capital, they have to turn these opportunities down," she says. "Businesses with stellar credit can still get loans, but the definition of 'stellar' is now in the stratosphere. That's the real problem we're dealing with right now."

Along with the evaporation of credit, the IPO market has also ground to a virtual halt, crippled by the collapse of Lehman Brothers and struggles of other large mergers and acquisitions advisors. Only seven venture-based companies have gone public thus far in 2008, compared to 69 such IPOs at this time last year.

Financial Literacy

In recent years, it has been relatively easy for small businesses to borrow money. Banks have been aggressively pursuing entrepreneurs and creating new types of credit products to meet their needs, including small business home equity loans and credit cards with generous credit lines.

As a result, "owners haven't really had to exercise their financial muscles much lately," says Landis. "To access the credit they need to keep growing, or simply keep their doors open, business owners need to take steps now to improve their financial literacy."

According to John Barrickman, the president of New Horizons Financial Group, a Roswell-based consulting firm that specializes in small business financing and management, using home equity loans and credit cards to fund a business simply won't be a viable option for many owners going forward. "They can talk to their bank about more traditional business loans, but they should be prepared to provide much more financial documentation than in the past," he says, including cash flow statements, balance sheets and income statements.

To obtain financing in the new reality we are all facing today, you must be able to demonstrate a thorough understanding of your business's finances from the inside-out, as well as strong internal controls and a track record of solid financial performance. "Be able to explain what you want to use the money for and how you will pay it back," Barrickman says, "and be prepared to pledge collateral and offer personal guarantees for a loan."

Back to Basics

Both Landis and Barrickman agree that the key to growth, or even survival, for most small businesses in the challenging economic environment that lies ahead will be a "back to basics" approach to financial management. Barrickman identifies four specific areas to concentrate on:

1. Sales - Companies that sell directly to consumers will find the going especially rough. "Retailers, restaurants, entertainment - any business that relies on consumers' discretionary income will be challenged as people think twice about spending money," says Barrickman. He recommends that companies refocus on and emphasize their value proposition and look for opportunities to take business away from their competitors, which may be easier than finding new customers.

2. Margins - Gross margins must be protected at all costs, Barrickman stresses. This means keeping a close eye on your material costs and cost-of-goods-sold, especially with inflation rearing its ugly head.

3. Overhead - In this economic environment, "excessive overhead will eat your lunch," says Barrickman. "Look at your investment in fixed assets - especially buildings, surplus equipment and non-productive assets - and try to find ways to convert them to cash."

4. Efficiency - Specifically, focus on improving the efficiency of your operating cycle. For example, stay on top of your inventory to carefully monitor items that aren't selling, generate and mail invoices quickly, renew your efforts to collect past-due receivables, and take advantage of payment terms offered by your suppliers.

"If you're carrying excess inventory, figure out how much this is costing you," says Barrickman. "Can you shift some of this burden to your suppliers by implementing just-in-time inventory management practices? Also, talk to your banker about cash management services like remote capture deposit that can help you get your cash working for your business faster."

The idea, says Landis, is to free up money internally by squeezing every last bit of cash out of your operations that you can. "I tell owners they need to get cash out of the pond and flowing down the river to start turning the turbines of their business' engine again. Every dollar you can squeeze out of operations is one dollar you don't have to borrow."

Keep the Customers You Have

Finally, and perhaps most importantly, don't forget about your customers. "Take good care of your best customers, and target your competitors' best customers - especially competitors who are struggling," says Barrickman.

"Forward-looking business owners will take advantage of this time right now to be ready for the recovery," says Landis. "The smart businesses I see are positioning themselves financially to survive and thrive despite the challenges of the current economy."

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