Financial Focus for the Small Business Owner

There is no doubt that the current financial situation is creating stress for almost everyone.  While the focus is on the banking sector and concern for their liquidity issues, many small businesses have felt the credit pinch first.  I have anecdotal evidence that small business owners are being denied credit terms from vendors and their credit lines are being reduced or eliminated.  Sadly, the small business is being squeezed more than any sector even though small business represents a good portion of the “fuel” that powers our economy.  Does this mean that all is potentially lost?  The answer is a resounding NO.   However, there are some proactive measures one can take to mitigate risk and limit the need for credit to ride out the storm.

One must remember that the very basis of our economy is entrepreneurship, and we have experienced ebbs and flows of this principal throughout our history.  In order to survive the tumultuous nature of the marketplace, the small business owner must be prepared for volatility in a time where there is little safety net.  This is a scary sounding statement, but pragmatism is the first step towards good planning.  The greatest issue facing our economy and your business is the great unknown.  Will we face a complete failure, a moderate failure, or has the situation been overblown?  The answer, of course, depends on whom you ask, and it is a losing proposition to make sense of the various and contradictory voices.

What should be the plan of attack when the enemy is the great unknown?  First, don’t panic.  Second, think through some items that seem obvious, but, for many, are still on the to-do list:

  1. ASSETS – Review Portfolios – The Financial Times is reporting that US investors sold $74bn in mutual fund assets in the last month.  If you have stocks with significant gains, consider paring the position and placing a stop loss order (a standing order that will sell the stock if it falls below a predetermined price) for the unsold balance.  Work with your financial adviser to determine if holding on to losing positions makes sense.
  2. FDIC – Consider the dollar amount housed in payroll and personal accounts.  While there is discussion to increase FDIC insurance to a maximum of $250,000 from $100,000, this change has not taken place.  Consult the link to the FDIC if you have questions about coverage.  http://www.fdic.gov/consumers/banking/facts/index.html – Remember, the FDIC protects money market deposit accounts but DOES NOT protect mutual fund money market accounts.  Review the following link to understand the difference between a mutual fund money market and money market deposit account if you unsure.  http://www.fdic.gov/consumers/consumer/information/fdiciorn.html
  3. REVIEW forecasts for the fourth quarter of 2008 and the first quarter of 2009 so that you can validate pending orders, accounts payable and receivable for the next 6 months.  Many vendors are willing to spread out delivery cycles in lieu of outright cancellations.  This can prove to be a win-win for everyone involved.
  4. COMMUNICATE and spend a little extra time with your clients to validate the value proposition of an ongoing relationship.
  5. CREDIT – Banks are still renewing lines of credit, but be prepared to go through a 3rd degree interview when you have been a great client for many years.  Be sure that your balance sheet is in good order, and understand potential weaknesses.  Underwriters are being required to be extremely judicious with credit funds.  On the flip side, consider what you alternatives are if your credit line is not renewed or approved.  Can you renegotiate terms with suppliers and vendors? – even 10 days will make a difference if you are need of some credit terms.

Remember that planning and forecasting are your greatest allies when waging a war with the great unknown, and developing insight and a plan for a best and worst case scenario will help relieve some pressure.  The confusion and uncertainty will not abate for a while, and it is important to create a perspective that will last for the long haul.

Kirsten Francissen, JKBAY Consultancy

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