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Banker's Advice for the Self Employed Business Owner

I've been in banking/finance for 18 years, and for the past 12 years I've been a commercial banker lending to small and lower middle market businesses or business owners. My typical client is a business with gross revenues up to $30-40 million, and the owner is typically an affluent or high net worth individual. I really enjoy working with business owners and helping their financial dreams.

During this recent down turn I've seen a number of issues business owners are not dealing with effectively in the same manner. Some are on top of it, while others are lagging, and I felt compelled to share this data and some advice that might be helpful.

Speed and Breadth:

This economy down turn has been moving faster and deeper than many expected. And at the same time, I've seen too many people slow down their responsiveness to the issues of the day. This is mental paralysis stemming from either fear of what to do or an expectation that things will return to prior levels based on hope. Unfortunately, this is the environment where business owners need to move more quickly and decisively to protect their business operations and cash flow. Some specifics ideas include:

  1. Right sizing your business. In today's world we can't assume your gross revenues will return to prior levels in the near future, and it's important that your staffing levels reflect where you are today, and maybe where you are headed, especially if that is shrinking. Too many business owners struggle with down sizing and it causes operating expenses to balloon and net operating losses to mount.

  2. Owner's Salaries. I see a lot of business owners trying to maintain Officer Salaries to themselves that were supported by bubble level economies, which might not exist any more for many businesses, and a review of those salary levels needs to take place.

  3. Right sizing salaries in general. Salaries tend to make up the largest part of operating expenses for many businesses. In many industries, current salaries are reflective of peak gross revenue years, and with the current unemployment, there is little in the way of competition for your employees, and if need be, a review of your general salaries is warranted. I think about this way. If you need to reduce salaries across the board by 5 or 10% to re-align with this economy, I would imagine many employees would be tickled to retain their job. In many industries there is just little or no hiring going on and keeping a job is becoming more important than the absolute compensation level.

  4. Right sizing the physical space you use or rent. This can be one of the most significant parts of operating expenses, and evaluating the space you really need is important. Also, this is a great time to evaluate the current lease rates in your area and have a frank conversation with your landlord about reducing those expenditures if possible.

  5. Finally, during the prior good times, many businesses took on expenses that in times like this are purely discretionary or fluff. I recommended a comprehensive review of all expenditures, and eliminate the unnecessary items.

Sales, Sales, Sales:

The business owners I see struggling the most have failed at making the tough decisions and are waiting for long term clients to call them with new business. OUCH. The business owners I see performing better are making the tough decisions listed above, and they are also beating the streets for business. The economy did not go to ground zero, and there is still business out their (albeit less), and it takes an active approach to looking for it.

Do you have an active sales and marketing plan? Is it supported by bonus payments to support the effort and achievement? And is it being implemented consistently?

Survival Mode:

I've been telling clients and friends as early as the summer of 2008, "they want to do what ever they need to and get through the difficulties of this economy, especially the first half of 2009".

Back in the summer of 2008, I had a couple of prospects telling me about taking on business that was not profitable just to stay busy and to keep their employees working. Now occasionally, doing this for a large client that is a very profitable relationship might make sense, but as a normal course of busy I was concerned. My recommendation a that time and still is to date, is that a business owner (unless there is serious merits) should let the work that doesn't pencil into profit go to the competitor. Let this kind of money losing transactional business take your competition out of business.

It's also important to take the time to understand which clients you have that pose a significant risk to you. The account receivables you carry that are large and pose a concentration risk, or clients you know might not have the financial ability to pay you what you are owed. Again, letting some of these clients go to your competition might be prudent. Or think about some sort of upfront cash payment or partial cash payment method, so you don't get stuck in their financial problems. It's time to manage risk.

I'm now starting to here from my strongest clients that there competition is going out of business which is very good for those strong more viable entities that will remain in business. This is the period of the strong and fit businesses surviving through this economy and hopefully prospering in the future.

Your Personal Net Worth:

Most small to medium business owners have to sign a personal guarantee of their business loans, and as such their personal net worth is part of the potential repayment source for their business loans.

In this economic environment, I still see personal asset structures that negatively impact the business. Specifically, I see business owners with multiple real estate holdings that create no real positive cash flow, and it requires the business cash flow and profitability to carry those assets and their debt payments.

Unfortunately, those personal assets are declining in value while the business cash flow for many is declining, and the total stress on the business owner's total net worth is mounting.

Too many business owners are waiting too long to evaluate their personal assets to gauge if they are a true problem. Do you have too many real estate assets, or too many vehicles or toys? It's time to consider selling these assets because chances are they are not true cash flowing assets but intense liabilities.

Raising cash levels on the personal balance sheet and reducing debt payments relieves the pressure on the business performance in this economic period. To me this strategy is a must, and should be reviewed ASAP. Cash and cash flow is king, and this strategy impacts both.

You're Banking Relationship:

If you are a business owner that is dependant on your banks ability to lend you money, it's paramount that you maintain the very best relationship you can with your bank. Access to capital is your life line to success.

Most banks are under a great deal of pressure from federal auditors. These auditors are looking at loan clients at every bank. They are looking for borrowers who miss their financial covenants and create a default of loan terms and thereby raise serious red flags about their viability to repay a given loan. And, they are looking at borrower files and assessing if that client is submitting the required financial data in a timely manner so the bank can assess the strength of that borrower.

So, you want to treat your bank as if it were one of your most important business relationships. Take the time to understand what your financial covenants are (many business owners do not), and if you need some clarification on how to calculate your covenants or what their importance is, I would ask your banker to lunch and discuss these issues. Maintaining your financial covenants is very important in today's world.

Secondly, take the time to understand what financial information you are required to submit and by when and do it. You want to reduce the amount of red flags in your file at the bank. Hopefully by doing so, you can manage the perception that you are a great client. In today's world perception is as important as reality.

In summary, I hope today's business owners take the time to understand how fast the economy is changing, how fast the banking world is changing, and how fast asset values are changing. It requires a successful business owner to think and act differently than prior years. It's paramount that there be a serious focus on raising cash and cash flow, reducing expenses and debts and debt payments inside and outside the business.

I hope all is well, and best wishes in your future success.


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