Keeping your Business Buoyant
11 Sep, 2017
In the period post the Late Market Bubble of 2007, recession, slowdown, budget freezes and cost cutting were the most used words and implemented concepts. The tough conditions forced corporations to cut down massively on costs. This was followed by slashing of salaries, cancellation of bonuses and substantial layoffs.
The sector that was hit worst during this period was of Small Businesses and Self-Employed Professionals (SBSEPs). Low off take of sales, mounting expenses and diminishing cash flows were the top problems that the people in this category faced. The fact that banks were unwilling to lend money at this point only added to their difficulties. Not having anticipated this kind of a situation, SBSEPs were completely clueless about handling this unprecedented economic uncertainty.
What made the situation a lot graver was the fact that for SBSEPs, there is often a large overlap between their business and personal finances. This kind of a cash crunch is likely to hurt them more because of the dual responsibility of running their families, in addition to keeping their business afloat. Thus, what typically happens during a downturn is that personal investments and resources get used up to keep the business going.
Often, emotional attachments to the business cause many entrepreneurs to make rash decisions for survival. This is a risky move because it could result in high interest personal loans and mortgage real estate.
However, there are certain measures that SBSEPs can take to tackle such situations in the best possible way.
- Take stock
You must ask yourself a few important questions such as ‘What are my cash reserves?’, ‘For long will I be able to sustain the worst-case scenario?’ and ‘What are my likely cash flows in the next 12-24 months?’.
Especially during such times, Cash is the King and must be preserved. There should be enough liquid cash to fund the business for at least the coming 12 months, without taking on any additional debt. Dipping into personal funds must be a strict no-no.
To generate cash, consider disposing off inventory. This stands true, even if it means offering discounts or taking a hit on margins.
For those who are in the business of selling their own skills, pricing can be an issue. To counter it, ensuring that you’re ahead of the market, both in terms of pricing and skills, is a good idea.
Business owners are generally averse to diluting their equity stake in the organization. But considering the circumstances, this could prove to be a better option as compared to debt.
- Analyse risks
Problems arise in every business; the key is to anticipate them and take quick action to rectify any mistakes. Be prepared to act in advance. For example, laying off employees isn’t the only solution to tackle low sales. If you’re blessed with cash in the present, scaling up would be a better and more constructive option. It might assist in capitalizing on various opportunities that might arise.
- Defer expenses
Each expense must be evaluated and whether or not it will be able to generate additional business and cash flow must be evaluated. When a business is going through a turbulent phase, survival is the key. All expenses that don’t have an impact on cash flow must be put on hold or deferred.
If there are some key business investments that need to be made, critically evaluate the financial situation and determine whether waiting for another six months is going to cause a major difference.
- Don’t use credit lines
Liquidity in tough economic conditions is always a tight bind but the path of pessimism isn’t the right one to follow. Instead, ensuring that you have enough resources to make payroll, pay rent and other mandatory expenses is advisable.
One salient point would be to avoid too many high cost and short-term loans. These measures generally fail, unless there is some guarantee of receivables in the near future.
- Separate personal finances from the business
The danger of wiping out the entirety of one’s personal savings and resources, while trying to salvage the business, runs high with SBSEPs. If the business has been deteriorating consistently and is in the midst of severe crisis, a prudent call must be taken regarding funding it from personal funds or cutting one’s losses.
A majority of business owners are ill-equipped, or hesitant to take such decisions due to the emotional attachment they feel towards their business. Being inherent risk takers and generally optimistic people, business owners fail to take realistic or judicious decisions in such matters.
Conversely, it is important to remember that crisis breeds opportunity and that if you believe in yourself and your offering, the time might even be right to make a significant investment in your business.
Adhering to a few practices, based on ancient business wisdom, can help. So, remember to always keep your expenses low, cash flows healthy and have sufficient resources to run a marathon.