Tuesday, March 25, 2008
Three Tips to Stay Financially Viable in a Stagnant Economy
Recent months have shown a slowdown in the national economy. For the first time in many years consumers are showing less confidence in their future financial security. Those businesses that rely on consumer’s discretionary income are especially susceptible to the financial pinch of a tight economy. As consumer confidence wanes it becomes more important for small business owners to pay attention to their finances.
There are three areas to be considered by business owners and managers as they evaluate the financial future of their business. Simply they are profitability, expense and debt management. Let’s consider each.
First, pay attention to your profit centers. First of all, it is important to know where your revenue is coming from. Review your profit and loss statement and look at the areas where you are generating the most net profit. This is the product line(s) you want to continue to focus your marketing efforts. Maximizing sales in these areas will be essential.
Evaluate the areas where you are generating less net profit. See if there are ways to cut production costs of these products. Consider combining less profitable products with those with a higher margin. In marketing terms this is called “bundling”. It allows for more profitable products to increase the overall profits when sold together. By bundling you also bring more value to your client. In a weak economy, customers are looking for the best value. This marketing technique addresses the clients’ desire for finding the best value. This additional value should translate to increased sales.
Next, managing expenses becomes essential in keeping your business financially solvent. Reviewing and understanding the expense lines of your profit and loss statement will help you to find areas where unneeded expenses can be reduced or eliminated.
Pay close attention to product inventory. Keep on hand only those products which you need for immediate production needs. Many suppliers will offer discounts for volume purchases. When cash flow becomes tight, as it may well, in a soft economy it is important to keep your assets as liquid as possible. You may have to pay slightly more for products but in the long run you may save. The reason being, if you have to borrow to cover expenses later on because you overstocked inventory, the interest you pay on borrowed money will very likely be more than the savings on purchasing the original inventory.
Now is not the time to make new capital expenditures. This sometimes can be the hardest thing to reign in. With new technology and products coming into the marketplace comes the desire to have the latest greatest new tool or piece of equipment. STOP! There are some questions you need to ask. First, how will this item improve the profitability of my business? If you cannot justify on paper how this investment improves your bottom line you should not make the purchase.
Next, take your emotions out of these decisions. When considering asset acquisition, compare products, price and performance before making a buying decision. Sleep on these decisions. If you happen to be attending a trade show or your visiting a supplier’s show room, don’t be pressured into making the decision on the spot. Before you consider these items you should do your homework and know exactly what the product can do to benefit your business. Remember, this is a business decision and you don’t want your desire to ‘have’ override the need and the potential return on the investment.
Finally, if you can’t pay cash for the item, you probably should not buy it. Taking loans on capital expenses in a downturned economy can spell disaster for your small business. As cash flow tightens it may become harder to make payments on business loans. Creating a system of asset replacement through depreciation management is a much more viable and safe way to manage asset acquisition.
The last area is taking care of debt. If you are currently carrying debt you should evaluate your interest rate and repayment method. High interest rate credit cards are bad news if you are unable to pay off your balance each month. Making minimum payments means you are only covering interest and maybe a small part of the principal balance.
A good option for many small businesses with debt is to refinance into a traditional bank loan. Generally the interest rates will be much lower and you can establish a monthly payment which will allow you to save money on interest and retire the debt much sooner.
Managing cash flow is also important to managing debt. If you have a good business plan and financial history of your business you may be able to consider a business line of credit. Many banks offer lines of credit for business. Generally the interest rate will be lower. This type of credit allows you to tap into the line when you need funds and repay as you are able. A line of credit takes strict discipline to use it wisely. In your business plan, the bank will want to see your projected cash flow as you ability to repay the credit line.
Bonus tip. Providing your clients with outstanding customer service is a great way to keep the business coming. Taking care of your customers needs and going beyond their expectations is essential to sustaining and growing your business.
So, in review, manage your inventory, keep cash in your pocket not in your supply closet. Don’t make investments into unneeded capital assets. Manage your debt load. Don’t take on more than you can manage and finally, take outstanding care of your customers.