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Why This Recession Is Different

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As too many small retailers have learned -- and are still learning -- this recession is different from those in the past.

This recession is a credit-driven recession. The lack of available credit, and the withdrawing of credit, has been the pinch point for many businesses in this downturn.

For smaller retailers, this means that as both your profit and loss statement and balance sheet come under pressure, you've got to pay close attention to your covenants and in close communication with your lender.

For many, the focus has been on the P&L, but it's a major mistake to take your eye off your balance sheet. You can be sure your lender won't. In fact, the balance sheet is likely the place your lender will begin.

One of the things lenders will track the closest is your inventory. Most of your asset base is likely invested in inventory, and if that's increasing during a time of declining revenues, that's an important tip off to your lender that you are likely to need additional financing in the face of declining free cash flow.

A key metric, which you need to watch like a hawk during these challenging times, is inventory turn. If inventory turn is slowing, that's likely to be a significant red flag to your lender. It means that inventory has not been brought down in line with your declining revenues, and portends all sort of potential trouble down the road. When sales decline, inventory must be brought down accordingly. A slowing of inventory turn, in the face of declining revenues, is not sustainable for very long.

In this credit recession, managing your credit, and your lender, take on added significance. Be sure to keep an eye on all of your covenants -- but also be sure to watch your inventory turn very closely.

Last updated: May 15, 2009




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