By Nikki Kallio
With inflation creeping up and the economic outlook looking less than stellar, small and mid-size business owners may be wondering what the next year will bring and how to manage it.
Finance and banking experts say it’s all about ensuring you have a plan to weather the storm.
“Nobody wants to use the word ‘recession,’” says Chris LeFever, director of business banking at Associated Bank in Green Bay. “Call it what you want — things are more expensive, it’s harder to get things done and there’s general concern.”
The good news is, Northeast Wisconsin and the state in general have managed recent downturns without suffering the same cost peaks and valleys of the coasts.
“It’s just a bit of a more stable area,” says Mike Waters, market president at Settlers Bank in Appleton. “Certainly we saw some big challenges, even in this area, in 2008 and 2009, but we tend to weather these economic pullbacks better than other parts of the country. And we’ve got that stable manufacturing base economy that’s helpful.”
LeFever would encourage his business banking customers to first review cash reserves and liquidity, he says. While there are various factors to consider, LeFever recommends that companies have at least three months of general expenses in liquidity — that means cash on hand, not lines of credit.
“The idea that cash is king has never been more important,” LeFever says.
And while business owners instinctively may want to pay off debt to eliminate having to make those payments, “doing so may have the opposite effect by depleting your cash flows,” he says.
Make a plan
Talking about your balance sheet with your advisors, such as accountants and bankers, is vital to prepping for the tougher times, Waters says.
“Take a look: Is there equity there?” Waters says. “Do you have capital? If you go through a rough patch where revenue retracts, are you going to be able to make the right moves and have enough liquidity on that balance sheet to take a bit of a downturn?”
Nicolet National Bank experts also suggest looking at variables such as what will happen if revenues continue to decrease or if wages or costs continue to increase, as well as what metrics are unique to the business.
“What would be your practices or what would you do if these things happened?” says Brian Paschen, senior vice president of commercial banking at Nicolet National Bank.
Always analyze metrics that are current and consider factors such as how many quotes you’re offering and your success rate: “That’ll really help gauge where you sit going forward,” says Todd Healy, Nicolet’s vice president for commercial banking.
A business owner also can ask their accountant to help create a forecast of six months to a year of their cash flows, which can help anticipate shortages and excesses, LeFever says.
“Their CPAs are equipped to either provide them tools to do it themselves or help guide them,” LeFever says. “A lot of small businesses know how to build the widget. But they’re not always thinking about creating cash flow and thinking about forecasting.”
Check your line of credit
The experience of managing through the COVID-19 pandemic has provided some adaptability during difficult times for regional businesses, making them more aware of both their balance sheets and their working capital, Waters says. “I think they’re also cognizant of making sure they have the available working capital. And for a lot of businesses, that comes in the form of their cash and their current assets, but also their lines of credit with their bank.”
Businesses should work with lenders to secure financing before they need it, LeFever says. Typically, a line of credit no more than 20% of annual revenue can help support the company.
“For most small businesses, their bank or their financial institution is prepared to help them apply and think about the type of line of credit that would support their company,” LeFever says.
Protect revenue
Additionally, now is not the time to chase risky ventures, LeFever says. Instead, invest in your current customers. “They’ve already hired you,” he says. “They can be advocates for you, and spending time and resources with them can continue to preserve appropriate revenues from them.”
Diversifying existing revenue channels can help as well, because if one is challenged, the other may be able to carry the weight for a while, LeFever says.
Each business owner should be staying on top of receivables and talking to customers about how they’re doing. How quickly are customers paying you? If a certain company is always paying on time and now starts slipping, “the sooner you can get ahead of that, the more likely you’re going to collect something,” Healy says. “And over time, we’ve had a lot of customers that have learned this the hard way.”
Businesses may want to think about negotiating discounts for payment at the time of delivery, such as a 3% discount on the invoice. “That can help you get paid sooner. And the 3% discount largely is offset by having the cash sooner than waiting another 30 or 45 days,” LeFever says.
On the flip side, companies also should determine where they can stretch their own payables to keep cash on hand longer, or consider paying with a credit card where appropriate.
“A lot of companies are accepting credit cards for inventory and raw materials,” LeFever says. “Again, the more cash you have on hand, the more you can preserve and manage cash flow.”
Keeping those lines of communication open can also help open new doors.
“[Customers] may even be able to shed some light on new opportunities that are created out of a slow term,” Healy says. “There might be ways that you can serve them differently that you hadn’t thought about in the past.”
They can also help with getting a bead on the economic climate. In November, the Fed raised interest rates 0.75-point in November, with another hike likely.
“Nobody has a crystal ball, but if a business owner would ask their vendors, ‘Hey, what are you seeing? What are you anticipating?’ you can incorporate that into your forecast as well,” Waters says. “And that can be very helpful in anticipation of what to expect for the months and year ahead.”
Supply chain issues also have been a hot topic during the past few years. Figuring out the right inventory strategy, including how much to keep on hand (as there’s a cost for warehousing) can also be an important way for businesses to save.
“Make sure that you truly understand what the vendor relationships look like, who can get you the products that you need,” Healy says. “And then thinking outside of the box — what are some other potential supply chain issues that might pop up that could impact us, and how do we navigate around that?”
Businesses also can ask whether they’re working with the right products or people, Paschen says. “Too many people get in the habit of doing business the way they’ve done it for the last 30 years. And it’s a great time to ask, am I servicing the right clientele? Should I be looking at a different sector of customers?”
In times of crisis like the pandemic, and even looking back to Prohibition, businesses had to change what they produced to make it through slower times, he says.
Employee engagement
Keeping employees in the loop can also help you find ways to keep expenses in check.
“Companies may not have gone through and just looked at process management from end to end and [trimmed] things that just might not be necessary, especially if you’re anticipating challenges,” LeFever says. “That really takes a leader digging into every process, asking leadership teams to find processes that don’t need to be done, expenses that are not necessary for core revenue generation.”
Healy says sharing certain metrics with your employee base and educating them on how they affect the company can help motivate and empower your people to work toward efficiencies.
“I think that makes them feel more part of the team and more willing to try to fix things if something needs to be fixed,” Healy says. “In an environment like that, you can kind of rally together as a team to help get through a slowdown.”
“Keeping a positive attitude from the top, I think, is very, very key employee management,” Paschen says. “Whether you’re feeling the stress or not on a daily basis, that can’t go down to your employees. Employees can sense that, to maybe abandon ship, because there are other places they can go. And the costs to rehire and retrain employees in today’s world are just too extraordinary to be doing that all the time.”
If you find yourself getting swamped
Talk to key personnel, including accountants and your banker — who isn’t only about lending and dollars and cents, Paschen says.
“Your banker should be a big part of your relationship and your management team and a confidant and someone who can help work through these things,” he says.
LeFever says don’t let pride get in the way of talking about finances becoming challenging. “The earlier you talk and the earlier you connect with a banker, the quicker you gain more ideas and gain solutions to some things that might be challenging your business,” he says.
Work with your trusted inner circle of your accountant and your banker, Paschen adds.
“Your banker doesn’t charge you by the hour,” LeFever says. “Use them to bounce off ideas; use them to gain ideas and to learn what their other customers are doing to offset or to navigate some of these challenging times. Now is a critical time to make sure that [owners] invest the time to work on the business and ensure it can withstand some of the economic headwinds that we’re likely to experience.”
“Number one, don’t hide your head in the sand,” Waters adds. “Hope is not a strategy. If you have good relationships — and you should — with your accountant, with your attorney, with your banker, there’s almost no problem we can’t help you solve if we know about it.”
