Like Obama, You Need to Be Prepared for a Cash Crunch
By now you've read about the trillion dollar coin, right? The idea was debated heavily by economists and pundits just last week.
It works like this: The President needs more money to keep his government in business. Because the government is running massive deficits, he has to borrow money. The amount of money he's allowed to borrow is limited by something called the debt ceiling. We'll reach this ceiling shortly...within the next few weeks. The only way the debt ceiling can be raised, as per the 14th amendment to the Constitution, is through a vote by Congress. Congress is reluctant to do this. But if the debt ceiling isn't raised, the U.S. Treasury won't be able to afford all of its current obligations and may default on some. The effects on the economy and the country's credit ratings could be significant.
But the President Can Get Money Elsewhere
Yes, his executive branch could mint a trillion dollar coin. Wait, what?
Only the Federal Reserve is authorized to print more money. But through an obscure loophole, the Treasury is allowed to print a coin for commemorative purposes and assign it a value. Although not the intention of the law, the way it's written gives the Treasury the authority to, in essence, create money for itself. Some economists have proposed that the Treasury issue a platinum coin, assign it a value of...let's see...OK...a trillion dollars, and then put it on deposit at the Federal Reserve so it can be used to pay bills and avoid the need to borrow more money and the debt ceiling limitation. Don't you feel silly now looking for a quarter for the parking meter? Plausible, debatable, or just downright crazy, the good news it that the White House this week said it would not be going down this road.
But the debate is important for business people, particularly small business owners. Because it raises a question that you should all be asking yourself: Is it finally time to immigrate to Canada? And, what's your trillion dollar coin?
At least the President has options. If Congress can be persuaded to authorize another increase to the nation's debt ceiling, the Fed can keep borrowing, so that the Treasury can continue to meet the country's obligations. Some economists say that the President can skirt the entire issue by issuing a Federal "scrip" or IOU. He could declare the 14th amendment unconstitutional and continue to spend. Or there's the trillion dollar coin.
What Could You Do in a Crunch?
What about your business? What are your options? What if the economy significantly slows? What if you lose that one big customer? Or a key employee leaves? What happens if that customer you were depending on falls through? Or a big competitor moves in down the road? Do you have options? Do you have funds available to see yourself through the storm until you right your ship? Or, at a minimum, a very good cocktail bar somewhere nearby? Unlike the U.S. government (at least for now) you can't just borrow more. Or issue a trillion dollar coin.
This is what's always on the minds of smart business owners I know. A typical employee may only have two weeks of job security. If you're running a small business you might be able to survive a few months if the you-know-what hits the fan. But what about after that?
Extra Cash on Hand
Tom, a client of mine who oversees a 50-person construction company, is very cash focused. When the times are good, he socks away cash. His rule of thumb is to have at least enough cash on hand to cover one year's expenses and, according to him, even that's not enough. In the past 30 years he's seen some great times and he's suffered through droughts. "That's what it's like to be in construction," he tells me.
Tom is no dummy. He knows the situation. When times are tough he can't borrow money or issue a trillion dollar coin. He has to lay people off, but keep the important staff employed for when things turn around. And he funds this through savings. In Pennsylvania, where he's located, he pays a little extra capital stock because of this. So check with your accountant about it. But Tom feels that it all evens out over time.
Business Interruption Insurance
Don't have tons of cash on hand? At least make sure you're insured. Every smart business owner I know has business interruption insurance. If you don't then you're not being smart. Stuff happens: sickness, fires, catastrophes, natural disasters. Just ask anyone located near the Jersey shore. A good business interruption insurance policy is the best long term investment you can make to ensure that your business continues. And having the right amount of liability insurance will help protect you against your mistakes too.
Working Capital Line of Credit
Your bank won't just raise your debt ceiling, like the U.S. Congress. But if you manage things right, you can have facilities available for when times get tight. This may be when a large customer delays a payment. Or a big purchase order comes due before your job finished as planned. Or maybe an opportunity arises that requires a big check and you don't have all the cash on hand. You can't issue a trillion dollar coin. So you must have a working capital line of credit available if you can qualify. The best time to negotiate this is when you don't need it. Sorry, but that's just the way banks work. Secure one as large as you can get. You'll have to pay a fee of course, but it's worth it. And your bank will require that you maintain certain financial covenants to renew it each year. That's worth it too. Your bank wants you to also be profitable so you can keep paying your fees.
Other Safety Nets
There are plenty of other options available too, as long as you think about them in advance. Maybe you've got personal savings. Or good friends or partners you know you can turn to if you need financing and a bank won't do. Or a little wiggle room available with your suppliers when push comes to shove. Maybe your life insurance policies are building up cash surrender values. Or properties that you own have gone up in value and can be mortgaged. Some clients I know have relationships with accounts receivable factoring companies in case they need the cash quicker. Others have a stash of inventory in their warehouse that they know they can unload for a quick buck. All of these options have their costs, of course. But the cost of not having reserves, not having a backup plan, could be fatal to your business. And remember--it's not just your business. It's your family, your employees, your customers, your partners, your suppliers, and your community who are relying on you.
You can't just issue a trillion dollar coin when you need the cash. But, trust me. At some point in your business life you will find yourself needing the cash. So what will you do? If anything, what's going on in Washington right now should make you think about that.
GENE MARKS | Columnist | Owner, Marks Group
Gene Marks is a columnist, author, and small-business owner. He oversees the Marks Group, a 10-person technology consultancy to small and medium-size businesses. A certified public accountant, Marks has also worked in the entrepreneurial services arm of KPMG. He writes for The New York Times, Forbes, and The Huffington Post.