Greater Expectations
10 tips for staying solvent by working with banks.
Some building products dealers are facing financial hardships for the first time in decades. A bad economy can change a dealer’s relationship with its bank in a flash, especially if that relationship wasn’t all that close to begin with. The American Bankers Association offers some hints about what banks expect from their customers in terms of financial management, and how small businesses can better utilize all of the resources afforded them by their bankers during a downturn.
1–During tough times, cash is king. Dealers need to examine any capital purchase that will require additional debt, with an eye towards understanding if the expenditure will generate cash flow needed to pay for itself. If the new item won’t throw off enough new cash over a reasonable period of time, defer the purchase.
2–Let a budget be your financial road map. Without a realistic budget for income and expenses, dealers are flying in the dark. That budget must be updated frequently and should also track a dealer’s personal expenses, which can become an invisible cash drain if left untended.
3–Objectively look at your business’ financial position and performance. Remember: in tough times, survival is the goal. Are you getting the maximum return from your investment? Are your non-business assets generating a maximum return? Should you sell assets that are not contributing to the financial health of your business?
4–Examine how your debt is structured. Is there an imbalance between your company’s long- and short-term debt? Is it possible to increase your long-term debt to pay down your short-term debt? You may be able to increase your monthly cash flow by spreading out your short-term debt over a longer period of time. Be cautious about taking a loan against long-term assets such as real estate; it’s like drawing against your “life” savings account.
5–Prepare for your financial review with your banker. Often bankers spend more time looking for misplaced information instead of concentrating on resolving important issues. If you are having financial problems, put your thoughts about how to resolve them on paper so your banker can review them with you. Have current inventories, cash flows, and balance sheets ready for such a review.
6–If borrowing for growth, consider Small Business Administration?guaranteed loan programs. Your banker may be able to restructure your business debt over a longer period if the SBA will provide a credit guarantee on your loan to the bank. If your business is located in a qualifying rural area, your business may qualify for a Business and Industry Guaranteed Loan offered by the Department of Agriculture’s Rural Development Agency. Many states also offer financial and technical assistance to small businesses.
7–Review hazard and fire insurance coverage. Increasing deductibles can lower your premium. Carefully review every item on your inventory list and consider eliminating coverage on obsolete or low-risk items.
8–Carefully examine life insurance policies. Many whole life policies contain provisions that allow companies to borrow against the cash surrender value at low rates or allow them to deduct the premium costs from the cash surrender value. What type of life insurance do you have? Is it worthwhile to maintain a costly whole life policy when you could get similar coverage from a less expensive term policy? But never go bare: All key personnel in the business should be covered so that the business can continue in the absence of any specific member of the management team.
9–Deal with financial problems immediately. When an issue arises that impacts your cash flow, be proactive. Talk to your banker early and often. A good way to avoid serious financial problems is to identify and resolve them early. Create a personal “board of directors” comprised of people you know and respect, who can be your sounding board. Make sure your banker is a member.
10–Maintain a clear perspective. One of the best ways to think through business problems is to get away from them. Take a weekend off to engage in non-business activities. It will make your home team and business stronger.
–John Caulfield
