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How to keep your business going
Amar Pandit | February 17, 2009 10:51 IST
Just two days back, Citigroup head honcho Vikram Pandit announced a $1 salary and no bonus, till the bank returns to profitability. Similarly, there are massive layoffs and salary cuts across big corporations.
Things are even worse for small businesses and self employed professionals (SBSEPs). A lot of them have seen low off take of sales, mounting expenses and diminishing cash flow. At the same time, banks have been unwilling to lend.
In fact, SBSEPs would have never imagined facing such a situation. And the younger ones would have never experienced such an unprecedented economic uncertainty.
The situation can become even more severe because SBSEPs tend to maintain a very thin line between business and personal finances. This crunch could hurt them much more because they have the dual responsibility of keeping their businesses and families running.
Typically in a downturn, SBSEPs end up utilising personal investments and resources just to keep the business going. Often many entrepreneurs make decisions because they are emotionally attached to their business. There is a willingness to risk it all to ensure survival. This could lead to high interest personal loans or mortgage real estate.
There are few things SBSEPs could do in these uncertain times to ensure that they are able to tackle the situation better.
TAKE STOCK: Ask yourself these important questions.
Cash is indeed king in such times. Preserve it, as much as possible. You must have enough liquidity to fund your business for the next 12 months at least, without taking any additional debt. Dipping into personal investment is also a strict no.
To generate cash, dispose off the inventory. Even if it means offering discounts and taking a hit on margins, go for it.
Even for professionals, who are in the business of selling their skills, pricing could be an issue in today's market. Ensuring that you are ahead of the market both, in terms of pricing and skills will help.
Business owners are generally averse to diluting their equity stake in the organisation. Again, this could be a good option rather than debt.
ANALYSE RISKS: Be prepared to take action in advance. For instance, if sales are down, it is not necessary that laying-off employees is the only solution.
In fact, if you are blessed with cash, scale up now. This might help you capitalise on the various opportunities presented. This depends on the type of business and your overall situation.
The key is that you must anticipate problems and take quick action.
DEFER EXPENSES: Evaluate every expense and whether it can generate additional business and cash flows. In turbulent times, survival is key. All expenses that do not have a direct impact on cash flows can wait and should be deferred.
Even if there is some important business investment that you have to make, critically evaluate your overall financial situation and whether this can wait another six months or so.
DON'T USE CREDIT LINES: Liquidity is often tight in tough economic situations and if 2008 meant panic, 2009 could probably be worse. Don't be too pessimist. Instead ensure that you have sufficient resources to meet payroll, rent and other mandatory expenses.
A key point is to avoid too many high cost and short-term loans. Generally, these measures do not work, unless you are extremely sure of receivables in the next couple of months.
SEPARATE PERSONAL FROM BUSINESS: The biggest risk for SBSEPs is that they might not only lose their business, but also wipe out their entire personal savings and resources. If your business has been deteriorating consistently and is in the midst of a severe crisis, you must take a prudent call whether to continue funding it from personal resources or cut losses.
Majority of the business owners will be ill-equipped to take such as decision because of the emotional attachment. Being inherent risk takers and generally optimistic folk, business owners fail to take realistic and judicious calls in such matters.
However, do keep in mind that crisis breeds opportunity and this might even be a time to make a significant investment in your business if you believe, you have a blockbuster in hand.
Finally remember ancient business wisdom; Keep your expenses low, cash flows healthy and have sufficient resources to run a marathon.
The writer is director, My Financial Advisor.
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