Weathering the Recession: Steps to Promote the Long-Term Health of Your Company

January 12, 2009

As the present recession and housing downturn deepen with no foreseeable end in sight, it is critical that business owners take all necessary steps to promote the long-term health and viability of their companies. Below are several things you, as a business owner, can do now to increase your chances of still being in business when the economy and housing market rebound.

Minimize Expenses
With less work coming in, it naturally follows that expenses must decrease. Most of you have already reduced payroll, but the cuts should not stop there. Take a hyper-critical look at all expenses, and cut or eliminate those that are not crucial to maintaining your business. Here are some specific considerations and things to look out for:

  • Scrutinize Costs Closely. In good economic times, expenses creep upward. Phone bills, office expenses and other overhead expenses are not scrutinized and tend to get out of control. Now is the time to take a critical look at all expenses and minimize, minimize, minimize. By splitting large expenses into smaller subgroups, you can better manage where your money is going.
  • Staff. There are other ways to decrease payroll aside from terminating employees. By using temporary employees and outsourcing such tasks as accounting or human resources, you can reduce overall payroll. Additionally, consider cutting salaries and wages, and/or hours. Many of your employees would rather make less than lose their jobs. When it is time to terminate permanent employees, it is important to insure that you comply with all state and federal laws such as Wisconsin’s Business Closing and Mass Layoff Law, Wis. Stat. § 109.07, the U.S. Department of Labor Worker Adjustment and Retraining Notification Act (WARN), and all equal opportunity employment laws.
  • Find Deals. Remember, all are struggling in this economy. You can decrease expenses by finding deals on those items you need to operate your business. Do not be afraid to bargain for a lower price or to seek multiple quotes from suppliers. Renegotiate with trusted vendors. Additionally, be on the lookout for liquidation sales. As your competitors go out of business or declare bankruptcy, you may find that now is a great time to purchase a much needed piece of equipment to help you operate more efficiently.
  • Space. Ask yourself whether you need all of the space you currently rent or own. Consider subletting unused space or, if your lease is up for renewal, consider negotiating for less space or reduced rent. Depending on your circumstances and market, selling your building and renting smaller and/or lower cost space in another market could save you money.
  • Marketing. Conventional wisdom is that businesses should increase their marketing efforts in a down economy. This does not mean that you should or need to increase your marketing budget. Instead, focus on low or no-cost marketing techniques and use this down-time to strengthen your existing customer relationships.

Focus on Cash Flow and Double Your Efforts to Recover Accounts Receivable
In a struggling economy, it is even more important that you focus on cash flow, keep a tight control on where your money is going, and redouble your efforts to keep accounts receivable current.

  • Analyze Cash Flow. Not only should you scrutinize your costs as discussed above, but now more than ever it is critical that you understand where your company’s money is going. Until you know what money is coming in and where that money is going, you cannot fully understand whether additional funds are needed and where those funds should come from (i.e. external sources of funding or cash on hand).
  • Collect the Money. One of the primary means of augmenting cash flow is to concentrate the company’s efforts on collecting accounts receivable. As the economy slows, businesses begin paying invoices later in order to better protect their own cash positions. Individual customers do this too. Understandably, you do not want to lose work by hounding your customers to pay their bills, but if you want to survive a prolonged recession you must insist that your customers pay invoices as they become due. Your customers should understand this, as many of them may be in the same situation. Strong cash flow will enable your company to avoid taking on additional debt. Do no extend too much credit to any customer now, and refuse to extend any additional credit to customers showing an inability or slowness to pay.
  • Establish Good Procedures. Insisting upon payment of invoices in the ordinary course is important for many reasons, not the least of which is that it may help you avoid having to pay those monies back in a bankruptcy proceeding. If your customer declares bankruptcy, a bankruptcy court may later require you to pay back payments made to you in the 90 days before the customer declared bankruptcy. One exception is if the payments were made in the ordinary course of business. This means that if you accepted payment from your customer on net-30 day terms, and the payments sought to be returned to the customer were paid on net-30 day terms, then you should be able to keep those payments. Additionally, you may consider demanding payment at the time an order is placed or delivered. This could also help you avoid having to return payments to the customer who later declares bankruptcy.

Keep Lenders and Creditors Informed
It is essential to your company’s financial health that you work with your lenders and other creditors. Do not bury your head in the sand. Financial institutions have been particularly impacted by the present recession, and the number of foreclosures has reached record highs. However, banks and other creditors would rather not own your company’s property or operate the business. If you find that you can no longer manage the company debt load, you should reach out to the company’s lenders and creditors. Indeed, even if you are able to pay your bills now, you may still want to renegotiate vendor contracts. Remember, they want to keep you as a customer in these tight economic times.

  • Communicate. Lending is a “relationship” business. This is true in bad times as well as good times. It is critical that you are open and honest with the company’s lenders and creditors about the company’s financial position and business plans. They will only work with the company to restructure debt if they believe that you have fully disclosed the company’s financial position.
  • Be Prepared. Pull together all of the loan documents or contracts and review them prior to any meeting with the lenders or creditors so that you know what rights your lenders and creditors have against you personally and the company. Be sure you know what you have personally guaranteed and what you have not.
  • Negotiate. You may find that the company’s lender may allow the company to reduce or suspend payments for a short period of time in exchange for additional concessions. This additional time can be used to seek refinancing or alternative sources to pay off the debt. But remember, before you take on additional debt or make concessions, nobody knows how long the recession will last and a limited extension may not give the company enough time to turn around.

Protect Your Own Finances
Finally, protect yourself. The credit crunch has led to tightening underwriting. In negotiating with your lenders and creditors, do not put your personal financial health at risk. Keep the following in mind:

  • Keep Separate Companies Separate. Don’t Cross-Collateralize. If you control several related companies, keep the assets and debts of those companies separate. You set up these separate companies for a reason: to protect the assets of one from the failure of another. Avoid commingling funds of these companies, paying the debts of one company from the assets of another. Also avoid cross-collateralizing assets from one company for the debt or another. Otherwise, one failure could turn into two.
  • Protect Your Personal Retirement Assets. Your personal retirement assets are most likely protected from creditors. In fact, even if you personally declared bankruptcy, most retirement assets are exempted from recovery by your creditors. Therefore, protect these assets and do not use them to pay off business debts.
  • Avoid Personally Guaranteeing Trade Debt. In a down economy the company’s suppliers may begin making additional payment demands on you and your company, especially if the company begins falling behind in its payments. However, you should not agree to personally guaranty the company’s trade debt. Trade creditors have many remedies at law to recover delinquent trade debt. Let the trade creditors seek recovery against the company in court. In the meantime, the company may come up with the funds to pay the trade creditor or a compromise may be reached.
  • Payroll Taxes. The company must stay current on its payroll taxes. In the event of non-payment, you may be personally liable.

Reviewing these tips now and keeping them in mind in the coming months may help save your business.

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