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Risk Management in Tight Credit Markets
– March 18, 2009
Suppose your banker called you this morning and said, “Joe, the home office on the East Coast has decided that it will no longer make loans to businesses in your industry; you will need to find alternative financing when your loan is up for renewal next month.” After you pick yourself up from the floor and take a mild sedative you begin asking yourself what the next step should be. This scenario is being played out across the country as lenders begin to manage their own risk.
Fortunately in Shreveport/Bossier and surrounding areas, we have many sound financial institutions that are eager to lend and are financially sound. However, they too are more careful in their lending requiring more loan covenants, more collateral and oftentimes a higher interest rate. Yes, the banks are borrowing at very low rates from the Feds and their depositors; but they are now pricing in the “risk” of the loan.
Businesses are built and sustained on relationships. Your banker, CPA and financial advisor are integral parts of a team that need to stay informed of your activity. No one likes surprises and problems can be addressed and solved with plenty of lead time.
Let’s review a few proactive steps a business can take to beat the tight credit markets and problems that might arise.
1. Ensure the bookkeeping and financial accounts of the business are up to date.
Keeping the accounting records up to date is an essential first step to ensuring the business owner knows exactly where the business stands. Reviewing recent financial performance and taking positive action to increase sales and margins where possible and control costs protects the business from surprises and downturns.
By having available the recent costs and benchmarks, action can be taken to reduce those costs or redeploy the cash to more productive areas. For example a detailed examination of the impact of advertising and promotion costs may indicate a need to redirect your marketing effort.
Not all services or products yield the same profit margin for the business. By concentrating efforts on the highest profit margin products and services less working capital is required.
2. Update your business plan.
When you started your business, you created a business plan based on the markets at that time. We are in uncharted waters. Failing to prepare an updated business plan considering markets today can be a plan to fail.
During a credit squeeze a business can find itself operating in an unstable market. Processes that worked in the past may not be the solution today. Banks increase the cost of borrowing. Customers begin to extend their time for paying vendors. Suppliers tighten their grip by increasing prices and demanding tighter payment periods.
Businesses must take steps to protect margins, cash flow and liquidity. If we fail to meet these new challenges, the business can slowly dissipate. Your financial forecast for the next twelve months should involve detailed cash flow analysis. It should contain several “what-if’s” so that you will be prepared for the best or the worst scenario. Each month measure the actual results to your forecast. It has never been more important to be timely with your monthly financial statements. You cannot manage a problem if you are viewing financial results a month old.
3. Maintain flexibility by keeping your financial options open.
No one keeps all of their eggs in one basket. A single bank may not offer products you need to effectively manage your cash flow. Many banks have departments that specialize in cash flow management. These professionals can help you establish accounts that meet the FDIC insurance guidelines. They can establish “lock-boxes” for your deposits so that your cash goes to work for you quickly. While the money market rates are dismal, the ability to pay down on your line of credit quickly is an interest expense savings. Rather than “sweep” cash overnight into an investment product, apply the surplus cash against your line of credit debt.
4. Improve sales and diversify your product offering.
It is easy to blame the economy when sales go down. When you started your sales may have been zero. Remember how the business obtained new sales channels and customers in the past and rebuild those networks.
Consider product diversification. There are always new opportunities including new products and markets, expand your geographical presence using technology.
5. Seek professional advice.
Increase the level of communication with your accountants, financial advisors, bankers and insurance representatives. Remember there is safety in numbers and several minds are better than one. Use your most trusted advisors.
Gerry Hedgcock, CPA
Tax Partner
318.429.2028
ghedg@hmvcpa.com
Gerry has more than 30 years experience in the accounting industry with a concentration in auto dealerships, real estate, cost segregation, profitability issues and the timber industry. In addition to his responsibilities as partner, Gerry plays a very proactive role in growing the firm as the partner-in-charge of Business Development.