In some cases it pays to communicate with others doing business in your industry as well. That's because in tough times other credit risks frequently crop up, according to James Carulas, a vice-president at Meaden & Moore, an accounting firm in Cleveland. "What you want to be vigilant against," he advises, "is the problem of winning a new customer that you don't really want. What happens is, some companies can't pay their existing suppliers on time--and can't get any new credit--so they suddenly want to do business with you instead. And maybe your salesperson will tell you, 'Hey, I've been trying to land this company for years and suddenly I got an order!' You've really got to do your homework here to make certain that the company is not a serious credit risk."
Controlling your accounts receivable is, of course, only part of the cash-flow equation. (See Managing Your Accounts Payable below.) Another important factor in the equation is maintaining your company's growth without letting costs go wild.
That was the challenge facing Jeffrey Austin, the president and chief operating officer of Austin Travel Corp., a travel agency based in Melville, N.Y., whose billings have doubled during the past few years to nearly $90 million. In Austin's business, the tough times started back in 1995, when fare wars, combined with industrywide commission cuts, clouded his revenue forecasts. "I get a daily cash-flow report so I can stay on top of every single expenditure," he notes. "At a certain point we began charging our customers a $5 fee each time we issued a plane ticket, because it was clear that we needed to find new ways to offset some of the costs we couldn't reduce any further." Thanks to those kinds of measures, Austin has preserved his bottom-line profit margins despite several years' worth of adverse market conditions.
Preserve your banking relationship
Granted, some growth companies weren't big enough, or established enough, to qualify for a line of credit even during the past few rosy years. But for many of those that could, the temptation has been powerful to leverage up--sometimes beyond the point of caution.
If your company fits into the latter category, now is the time to step back and take a dispassionate look at your credit picture and then fix any problems before they come back to haunt you. As Frederick Roberts of CDS notes, one of the key questions to ask yourself in difficult times is, Am I in a position of liquidity? He adds, "Related to that is the question, Can I identify nonproducing assets that the company has leveraged and find ways to reduce that leverage?"
Case in point: CDS owns a building that is mortgaged at $2.4 million. "But it's worth $3.9 million," Roberts says. "If I sell it, I'll reduce our leverage by more than $2 million, while adding another $1.5 million to our capital. That's money that can go directly after new revenues, without increasing our current market risks through leverage."
Another good way to reduce your company's debt load: ask yourself how much of a credit line it truly needs to do business and pursue its growth strategies--and if you're overextended past that point, try to figure out why. In far too many cases, entrepreneurial companies wind up borrowing from their bankers because of poor cash-flow practices (especially the failure to collect from customers on time). Reducing the average age of your outstanding receivables from 60 days to a more reasonable 30 or 40 can help you cut your company's borrowing and reduce interest charges.
Still, there are other points to keep in mind when evaluating your banking relationship these days. First and foremost, it pays to ask yourself one simple question: Does your banker feel calm about your company and its current conditions? Here's why that matters: an anxious, discontented loan officer is likely to ask you to pay down your credit line at the first sign of business difficulties, which are practically inevitable given the widespread nature of a global downturn.
Brett W. Kaplowitz, a vice-president at Potomac Valley Bank in Gaithersburg, Md., confides some signs that make him nervous when he detects them in corporate borrowers. "The first thing that tips me off is when I start seeing overdrafts in a company's checking account. I get reports on this daily, and I don't like to see patterns develop, either in the frequency of overdrafts or in the time it takes to get them paid off." Other troubling signs for him include a company's inability to comply with key loan covenants, especially those relating to liquidity or debt limits.
Usually, situations like those are a signal that there's a business crisis or a cash-flow crunch that executives hope to patch over by raising their borrowing level, on what they probably hope is a temporary basis. But John Evans, a partner at Arthur Andersen's Enterprise Group, based in New York City, warns that "you can't just go to a banker for more money when times get tough. You've got to go to him or her with information and a plan."
If, for example, your cash flow gets hit because one of your key customers stops paying promptly (maybe because all of his customers are Russian, Brazilian, and Malaysian), then your banker will be likelier to help you by easing your credit limit-- if you seem prepared to cope with that particular challenge. You can face it squarely by preparing a workout plan that states clearly how and when you expect to collect the problem receivable and others like it; you'll also want to include a description of how you'll minimize this type of risk in the future.
Above all else, be proactive: you will greatly increase your chances of success if you identify the problem rather than wait for your banker to make a nervous telephone call next time he or she picks up the newspaper. "The key is to think about your banker like a partner. If you have the attitude, 'God forbid my loan officer ever finds out about this one,' you'll only create more problems," Evans warns.
Collect those receivables!
Have you gotten a tad sloppy when it comes to your billing and collection procedures? Here's a quick blueprint for success:
