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Should You Be Panicking Right Now?

August 23, 2011



By Mike Periu Principal, EcoFin Media

American Express Open Forum‘s Original Post August 22, 2011

Is it time to panic?This summer has been absolutely brutal for those seeking financial peace of mind. For small business owners who took time before this summer to budget and plan ahead for 2011 and 2012, that effort may have been a waste. Economic conditions have shifted so much that old plans may no longer be relevant. It’s time to start over. So many things have gone wrong that the people that haven’t panicked yet are starting to wonder if maybe they should be panicking. If you are about to “lose it”—don’t. Take a deep breath, analyze the situation and adjust accordingly.

What can you do about it?

You have absolutely no control over what the stock market, the Fed, the European Central Bank, the Chinese government or what crazy rioters in London do or don’t do. There is no point in worrying about them. Focus on what you can control:

First, check your lines of credit

If current conditions continue to take a turn for the worst, the negligible increase we have experienced in small business lending will reverse sharply. Make sure that you fully understand all of the covenants associated with your outstanding loans and lines of credit.  Also, review the sections of your loan agreements that discuss the conditions under which your loans may be called. Many commercial lending agreements allow lenders to demand immediate repayment even if the borrower is fulfilling all of their obligations. If your loans have this condition, consider looking for new credit at more attractive terms or shifting balances to lenders with less onerous terms before things get worse.

Second, slash your sales forecasts.

Assume that your sales will not grow (or perhaps even contract) during the second half of 2011 and all of 2012. What type of cost cutting decisions would you have to make under this scenario? If the cuts can be made without hurting your current sales efforts then go ahead and begin implementing them right away. There is no benefit to waiting until a potential crisis hits.

Third, increase your DSO, A/R, and bad debt assumptions

In addition to assuming that you will sell less, you should also assume that it will take more time and become much harder to get paid from your customers. Just like you, they are hurting financially and a worsening of the current economic crisis may push them over the edge into non-payment. DSO stands for “Days Sales Outstanding.” It measures the number of days on average that it takes a client to pay you what they owe. A higher DSO means that it takes you longer to get paid.

You should also assume that more customers will request credit terms instead of paying in cash as they try to preserve their cash own position. This means that the balance on your accounts receivable will increase. Finally, you should also assume a higher percentage of those accounts receivables won’t be paid. Ever. Taken together, these assumptions mean that you will need more cash each month from a source other than sales to cover your expenses.

Fourth, hold an employee meeting

Don’t keep your employees in the dark. They read the news and watch the talking hands on evening television just like you. Rather than have them guess as to whether or not their jobs are secure, talk to them and be open about where things stand. Use this as an opportunity to create a team mindset. This will unify their resolve. Continue to reward in a visible way those employees that outperform. The worst message you could send to your employees as an owner is that hard work won’t be rewarded in troubling times.

Fifth, stay flexible

The next 12 months will be quite unpredictable. It’s more important than ever to stay open to new ideas and maintain the flexibility required to navigate what is shaping up to be an almost unprecedented crisis.

Image: nuttakit /

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