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How to Try to Save Your Business (and Your Own Personal Finances) During a Business Downturn or (If All Else Fails) Wind It Down

Avery Law

These are troubling times in the business world. Even the most viable business is struggling to handle the current landscape of uncertainty. Whether a business owner is striving to increase market share, preserve their business, or plan out how to best close down their company, each of them should consider the following:

Protect Your Financial Fundamentals.

Make sure that (in the short term) your company has adequate cash flow and access to capital. A lack of liquidity will create immediate problems for your company and hamper your ability to make smart investments in the future of the business.

Monitor and maximize your cash position, by reducing or postponing spending, and by focusing on cash inflow. Produce a rolling weekly report on your cash position that details expected near-term payments and receipts. Also estimate how your cash position is likely to evolve in the next few months, calculating expected cash inflows and outflows.

In a severe business downturn, ask yourself: How much spending dare I postpone? Consider eliminating all discretionary spending. But just as importantly, be aggressive in looking for ways to improve cash flow. Consider just how much cash would you be able to raise during the next quarter.

One way to improve cash flow is to more aggressively manage customer credit risk. Reduce where possible any financing (e.g., monthly payment plans) offered to your customers. Given such a poor economic environment, buyers will seek credit more frequently and your risk of not receiving payment has increased. To deal with this, segment your customers by assigning them each a credit rating. Avoid granting such financing to higher-risk customers or to those whose business is less strategically important to you. Also, assess the trade-off between credit risks and the revenue potential of a marginal sale.

Free up cash by aggressively managing your company’s working capital—the difference between a company’s current assets and liabilities. Reduce current assets, such as inventories (through more careful management of both production and sourcing processes) and receivables (as explained previously).

As you scrutinize your customers’ debt profiles, you should review your own as well, in order to optimize your financial structure and financing options. You should be looking for ways to strengthen your balance sheet, reducing debt and other liabilities, such as operating leases or unnecessary expenses, with the aim of reducing your financial risk.

Protect The Existing Business.

You must be prepared to act quickly and decisively to improve core operations.

Begin with aggressive moves to reduce costs and increase efficiency. Although cost-cutting is the first thing most companies think about, their actions are often tentative and conservative. You need to work rapidly to implement measures, using the turbulent economic environment to catalyze action that is long overdue—or to revive earlier initiatives that proved too controversial to fully implement in good times. Keep in mind, though, that while speed is important so is a well-reasoned plan: You don’t want to make cuts that in the long term (if you save your company) will hurt more than they help.

Opportunities to reduce materials and supply chain costs also arise in a downturn. Comprehensively review your current suppliers and procurement practices.

Aggressively manage cashflow. Actively work both to protect existing revenue and identify ways to generate additional revenue from your current business. Customer retention initiatives become more valuable than ever. Consider tactical changes in sales force utilization and incentives. Reallocate marketing spending to bolster immediate revenue generation rather than longer-term brand building.

Reconsider your product mix and pricing strategies in response to shifting customer needs. Purchasing behavior changes dramatically in a recession. Consumers increasingly opt for lower-priced alternatives to their usual purchases, trading down to buy private label products or to shop at discount retailers. Although some consumers will continue to trade up, they’ll do so in smaller numbers and in fewer categories. Consumer products companies should consider offering low-priced versions of popular products. Whatever your business, determine how the needs, preferences, and spending patterns of your customers, whether consumer or corporate, are affected by the economic climate.

Innovative pricing strategies may also alleviate downward pressure on revenue. Offering consumers new and creative customer financing packages could tip the balance in favor of a sale.

What if You Can’t Save Your Company?

If all of the above does not help you turn the corner, then consider how to proceed in the following order:

  1. Can I sell the company? You will get far more value by selling an operating business than simply selling its tangible assets. In addition, you will likely save your employees’ jobs. Consider approaching a business broker or investment banker to help you quickly find a buyer. Or, you may consider contacting a competitor to see if it would be willing to purchase your business quickly at a fair price.
  2. Can I complete a “workout” of my company’s debts by approaching each creditor and negotiating satisfaction of the debt at a lower amount? Only do this if you can’t succeed at all of the above. If you are successful doing this, first satisfy obligations relating to taxes, payroll, and debts personally guaranteed by you.
  3. Should I consider placing my company in bankruptcy? There will be many factors to consider, so this article can’t properly address them all. In addition, there are many misconceptions about what a business bankruptcy can achieve.

If you would like to discuss anything covered in this article, please reach out to us to set an appointment to discuss your company’s situation with one of our attorneys.

by Mark Avery