The Perils of Business as Usual

Survival Planning to Weather the Storm

During economic downturns, companies must learn to modify business practices in order to weather financial pressures. It is more important now than ever to avoid the pitfalls that plague management's response to business pressures. Many tools used by turnaround and management professionals are not mysterious or complicated, and attention to survival planning is critical. Here are several steps management should undertake to survive and even prosper during the recession.

1. Make Changes Now. Holding out hope that the economy will immediately recover is wishful thinking. The wiser approach is to appreciate the threat and take action now to manage risk and place the business in a position to survive tough times. Business consultants who regularly deal in financial distress preach early and aggressive action to withstand the effects of a prolonged downturn in the economy. Because the benefits of steps taken now may not be felt by the business for several months, it is imperative to be proactive in order to avoid a calamity.

2. Truly Understand Where the Business Stands Financially. Although it may sound relatively simple and obvious, all planning and decision-making must be based on reliable financial information. A successful business must produce up-to-date income statements, balance sheets, and cash flow projections, based upon reasonably conservative assumptions. Turnaround and workout professionals often spend a significant amount of time at the inception of the project helping management produce meaningful and reliable reports, and often find that businesses lack the financial data needed to analyze the condition of the business and determine what must be done to relieve financial pressures.

3. Analyze Whether Margins Can be Improved. The purpose of a for-profit business is to generate a profit margin, and a business that does not generate at least reasonable profit margins is suspect. If the financial data shows that margins are slim or non-existent in certain products or service areas, the business should consider discontinuing that line of business as quickly as possible. Now is not the time for lost leaders or efforts to dramatically increase sales to make up for lack of margins.

4. Reduce and Control Spending. Another simple-sounding step, but crucial to survival, is making difficult decisions in order to reduce and control spending. The business should make no assumptions about what is or is not needed, and encourage all employees to get involved. Oftentimes, employees will have suggestions for ways to cut costs that upper management may have overlooked. Management should focus on the largest expenses first, and then move the analysis to smaller cost items. Good cash flow forecasting should reveal what cash will be available, and that information can be molded into a budget to control spending.

5. Manage Accounts Payable. Many suppliers and vendors may need your business as much as you need them. Open up discussions with those vendors who do substantial business with you, and work out deals to improve terms and defer payments. Turnaround and management professionals will attest to the need to be aggressive in dealing with suppliers and other creditors, especially if the good or service supplied by the supplier is not unique or difficult to obtain elsewhere. If the obligation to any one supplier is very large, the business should consider negotiating a term promissory note, or even offer a share of equity in exchange for the problem account payable.

6. Collect Accounts Receivable. The need to collect accounts receivable as quickly as possible is critical in maintaining sufficient cash flow. Early and aggressive contact with customers is necessary to stay on their radar screens. Discounts for immediate payment should be considered, but only if the profit margin can withstand the offer. The business should immediately resolve any shipping or invoicing errors which can be used by customers to delay payment. The business should also explore "factoring" accounts receivable, which means selling the receivables to a third party who pays immediate cash to the business and takes over the collection process.

7. Watch Credit Like a Hawk. Many businesses are in worse shape than your business, but you may not know it. Before extending credit to new or existing customers, make sure the customer is creditworthy. Investigate public reports such as Dunn & Bradstreet, and ask the customer for financial information to help make the decision about providing credit. Be prepared to cut the customer off as quickly as possible if any payment problem develops.

8. Leverage Assets. Your business should consider selling unneeded equipment or inventory, and also explore "sale/leaseback" arrangements that free up cash for operations. It also may be wise to consider leasing equipment and furniture instead of investing valuable capital in buying depreciating property of this nature.

9. Manage the Sales Process. Your business should consider putting sales people on a "pay for performance" compensation arrangement, and ensure that the payment part of the equation only occurs when the customer actually pays, not when the sale is booked.

There are other steps to consider, including taking advantage of any net operating losses as a credits against current tax obligations, and pursuing an asset-based line of credit. Yes, even in these unusual times, there are lenders who will provide financing – at a price. Use of new lending should be a last resort, especially if the need for financing is not due to increases in business and the related need for additional inventory or personnel. Finally, watch what the competition is doing, and take advantage of any opportunity that might arise from others not heeding the warnings and following a plan to survive in this storm.

Henry Efroymson is a partner in Ice Miller's Bankruptcy and Debtor/Creditor Disputes Practice Group. Breadth of experience and client service are the hallmarks of his law practice. For over 27 years he has helped guide small, medium and large businesses through the complexities of financial distress.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice.  The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.