Remove Obstacles to Keep Cash, Credit Flowing
What does it take to make a business recession-proof?
There’s more to the job than simply having enough cash on hand or a reliable source of bank financing. You must also use your capital wisely.
That means running your business efficiently, paying close attention to three key elements of your operations:
* production and distribution
* staffing
* receivables and payables
These items are like boulders in a riverbed, which create swirls and eddies in the current. The goal is to keep the riverbed clear so cash flows unimpeded through your operations.
“You need cash and credit to buy the goods and services that you convert into your final product,” says Mitchell Freedman, whose Sherman Oaks accounting firm, Mitchell Freedman Accountancy Corp., consults with small and mid-size growth companies, including many serving the Southern California entertainment industry. “Without credit the business may slow. In the worst-case scenario, the business can die.”
Freedman counsels his clients to consult closely with suppliers and customers and stage their production cycles to tie up as little capital for as short a time as possible. This means timing the arrival of supplies, the delivery of goods, the disbursement of payables and, not least, the arrival of cash from receivables to speed cash flow.
“It’s more art than science,” he says, “and you have to know your suppliers and your customers really well--what suppliers can deliver on short notice and what your customers may want on short notice.
“A good manager negotiates careful timelines for production, delivery, and payment.”
The art, he says, lies in the balancing of these factors--never easy to do, and very difficult when tough times harry the business manager.
There also is an art to attracting and retaining key employees in tough times.
“When times are good, managers can get a little loose,” Freedman says, “but when times are tight, you have to concentrate your efficiencies, and that can mean looking at your staffing to eliminate redundancies. But you also have to be certain not to cut the meat out of your company. If you need employees with specialized skills, you can lose them to the competition if you don’t have the resources to reward them appropriately.”
For the small-business owner, the key is to maintain the personal connection between employer and employee that can make working for small businesses so rewarding, Freedman says. But you can also be creative in shaving payroll costs, perhaps by offering flexible scheduling or by shortening the workweek for employees paid by the hour.
Last but not least, there also is an art to managing payables and receivables in tough times. Here too you can find efficiencies that make a difference.
“You can stretch out your payments to creditors, and it’s likely that your customers will slow down their payments to you too. But you have to walk a very careful line because your suppliers are a very important component of your business operation, and you don’t want to go from being one of their A-list customers to one of their B-list customers.”
This makes it crucial to have a reliable source of cash in tough times. Cash is the lifeblood of the business, and as the economy slows it becomes the rarest commodity.
“Get yourself a line of credit to carry you through the slowdown,” Freedman says. “You may not have to use it, but you want to have it there. To a business, a credit line is like a credit card to the individual. Even if you pay it off every month, if you lose your job, it can get you through difficult times.”
Recent Financing and Insurance columns are available at https://www.latimes.com/finin. Juan Hovey can be reached at (805) 492-7909 or at jhovey@gte.net.
