(This post ran as my column in this week’s Tennessean).
Given the continued bad economic reports, many entrepreneurs are trying to understand how they should react to the changing conditions. The best answer is — it depends.
How you should position a business for the coming months boils down to four key factors: cash flow, debt load, financial trends and the condition of your specific industry and customers.
As I have written many times before, cash is king. But what does that mean in practical terms?
Given the uncertainty of the economy, entrepreneurs should try to keep enough cash on hand to cover at least 30 days of monthly expenses. Businesses that sell on account should keep an eye on accounts receivable. If customers are taking longer to pay, it will eventually put a strain on cash flow.
I have also been encouraging entrepreneurs to pay attention to debt load. Make sure there is more than enough cash flow to cover monthly bank payments. Also monitor your total debt load using the debt to assets ratio (total debt divided by total assets). In today’s climate the lower this ratio is the better — so try to keep this ratio to less than 0.20.
There are also several key financial trends that need monitoring. Are sales growing or declining? How about profits?
Some businesses will expand
Finally, the condition of your industry and customers will play an important role in determining how you should proceed. If what you sell is a necessity or you offer a greater value than your competitors, you may be somewhat insulated from worsening conditions.
For example, Emma is an e-mail marketing company in Nashville. Emma is gaining new customers even in the current economic decline. They have found that some businesses are seeking ways to advertise and promote at a lower cost with a higher impact.
On the other hand, if your sales are part of a customer’s discretionary spending, keep in mind that your product or service will be the first to get cut or postponed. That is why businesses that sell business office equipment, home furnishings, cars, electronics, and so forth have recently fallen on hard times.
If your business is weak in all four of these areas, it is highly vulnerable to possible failure if conditions don’t improve very soon. Although failure is not inevitable, be realistic and seek counsel from your bankers, attorneys and other advisers.
If your business is weak in some of these factors, it is time to pay attention to the basics — cut overhead, pay down debt, and take good care of the customers you have so you don’t lose any more ground.
However, if your business is relatively healthy in all four of these areas, it may be time to seek opportunities for growth through marketing and even acquisition.
Dr. Cornwall:
Just read your wonderful and to-the-point piece on how a small biz should navigate the current Credit/Financial mess. I loved it and thought you hit all the important issues!
I will begin to pay more attention to your Twitter Blogs and your articles and books…This one let’s us know that you know what you are talking about.
Great work!
The current condition of the economy is a huge concern to me right now, especially with ideas of opening a music venue relatively soon. My major concern is that so many people consider entertainment to be expendable, and live music will be one of the first things people cut out or cut back on in their lives.
Furthermore, record companies are not doing well, so they are trying to get a cut of revenues from bands touring, which will increase prices for bands. This is on top of prices already being raised to keep up with the high gas prices and increased expense of living in general.
I have a feeling it may be worse than I initially expected; music business people and clubs are supporting a movement to lower the drinking age to 18 to help increase bar sales and make touring more profitable overall. Has it really come to that?
On top of all of this, it appears as if it will be difficult to get funding to back a venture such as mine.
In this economy, I’m not sure a business like mine could prosper. However, Dr. C, you do make a good point that this is a real opportunity for some small businesses to make great gains. Companies like Emma are in an awesome position to gain more customers as people cut back from bigger agencies and more expensive means of advertising. If entrepreneurs are willing to look past the hardships of a tough economy, they will be able to see the freedom they have to create something that can flourish in this difficult time.