The Biz of Pacelinebiz

Turning things on end to achieve results!

Money, it’s a hit…

leave a comment »

Next Monday is Memorial Day and the unofficial beginning of summer.  Today will be my last business related blog topic until after Labor Day.  I will continue to post an occasional business related topic during the summer but will take a break and keep the weekly topics lighthearted for the most part. 

 Today, let’s talk about a big problem that plagues many businesses and especially so during an economic slowdown.  It is especially difficult today when credit has been very tight due to the banking crisis of 2008-2009.  We are still feeling those effects today.   The problem is undercapitalization.  It takes many forms and effects large corporations as well as mom and pop businesses. 

Here are some warning signs that you (or your customers) are lacking the capital needed to run your (their) business.   

  • You have less than a month’s cash needs available in your checking account (assuming your operating cycle is 1 month)
  • You have to wait to pay your bills until you get paid by your customer.
  • You would like to take advantage of good deals on new equipment but can’t afford to pay cash and you can’t get a loan.
  • Your equipment is past its life cycle.
  • You have deferred maintenance on your equipment that is past its life cycle.
  • You have stopped paying yourself.
  • You are behind on your payroll tax payments (this is a sure sign the end is near)

What can you do if you are in this position?  The best thing to do is not start a business without adequate cash or equity in your business.   If a slow down occurs, the capital you have can help you get through a tough period.  You also must realize quickly when there is a problem.  Stay on top of your receivables. Also, make sure you instruct your staff to pay bills according to your terms instead of your vendor’s terms.  I am not advocating abusing your relationship with your vendors but to make sure that you take as much lee way with your vendors as you are granting to your customers.  The best case scenario is to have your receivables collected faster than your are paying your payables.  If you are in an extended slow period and you have excess equipment, downsize your equipment in the same manner you would with your employees.  Always track your expenses so you never get to the point that there is any fat to cut.

 Don’t let your inventory expand.  If you have too much inventory, not only does it hurt cash flow but it can be stolen or become obsolete.  Think of inventory the way old-time college football coaches felt about passing the football.  Two things can happen when you pass the football and 2 are bad.

Focus as closely on your businesses financial matters as its operational aspects and you will be able to react quicker to avoid troubles before they begin.  You need to have an equal emphasis on sales, operations and financial matters.  If you are weak in an area then you need to admit that and assign someone to help you in this area.  There are many ways to get this type of help and it may not cost much, if anything.  Develop relationships with business owners in your community and ask for advice in areas which you are weak.  In the same way, always offer to reciprocate in an area where you have expertise. This can be done in a formal manner through a service organization such as Rotary, Kiwanis or Lions clubs or informally with a coffee or breakfast club of your peers in the business community.

Have a great week and safe Memorial Day weekend.

Advertisements

Written by pacelinebiz

May 24, 2010 at 8:17 pm

Posted in Business

Tagged with ,

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: