Every day we read more about the credit crisis. First came Wall Street and the banks; now credit card companies and small business credit lenders are in the news, asking for bailouts, requiring loans, or closing down. Because of this many small, credit-dependent businesses are now faced with a dual challenge: Survive in a down economy and do it with limited or no credit options.

Understanding Credit: A Historical Operating Perspective

In the early stages for many small businesses, credit cards, equity lines and vendor credit were often used to smooth temporary cash flow fluctuations. If a company needed to increase capacity (people, inventory, equipment) ahead of planned growth (and it was a level that would be funded by the expansion’s operating cash flows), borrowing was used to change the timing of the funds flowing in. The business needed the money today and the revenues could be generated from the future operations.


Unfortunately, the convenience and the ability to “think about it another day” caused many businesses to make purchases and expenditures without consideration of how they affected the bottom line, or how they would pay for them in the future. When these businesses grew, it was frequently with a philosophy of “we’ll find the customers later,” instead of growth resulting from customers coming in the door. These organizations became accustomed to operating on vendor credit, using credit lines not on a temporary or occasional basis, but as a means of sustaining a level of operations not actually supported by those operations.


Credit and Small Business in Crisis

Banks, credit card companies and vendors are now rethinking the amount of debt they will extend and the interest rates they expect customers to pay. Even the most “stable” of businesses have seen credit lines curtailed and interest rates jumping. Businesses that have been using credit as means of maintaining operations are now challenged to reevaluate their operations and their use of funding.


The economy and credit crisis are mandating a total rethinking of infrastructure, staffing, and operations focused on a survival and a realistic level of business activity. Many businesses have jumped into traditional cost cutting as the first step, cutting anything and everything they can find. The question now is: “Have they cut the right costs and enabled their organizations to stay competitive?”


Short-term and Long-term Competitiveness and Core Competencies Preserved

Immediate action to reduce costs is a logical and necessary step in addressing reduced revenues and curtailed cash flow. However, acting in haste will give plenty of time to regret for days, weeks and months to come—if you are lucky.

The objective of any cost-cutting action is to enable the business to survive and continue to move forward. For example: If you are making the decision to lay off members of your team, how has that decision been made? Are you thinking of employees like inventory (last in and first out), or are you targeting the most expensive people on your payroll?


Cost cutting without considering the long-term strategic impact may address your short-term cash flow issue, but what will it do to the organization later? Many companies have cut costs and created another looming crisis: What will happen when things turn around, or can they turn around after taking those actions? Many organizations are failing to take time to strategically analyze the business and determine the most valuable skill sets, the knowledge base and the competencies that need to be preserved for long-term viability.


Credit Crunch Actions

The first step in addressing credit issues is identification and definition of the issue and its scope. Is the credit reduced, limited or cancelled? Did the interest rate increase? Has the lender asked that you pay down the balance to your new limit? Did the credit card company go out of business and leave you hanging with bills due and no source of credit?


Second, determine the impact. What will these changes mean to the business today and in the long term? Think strategically.


Third, classify your issues:


  • Critical – address these needs today or this week (e.g., make payroll and find the funds to do so).
  • Urgent – find another source of capital for the next X days and address the “carrying costs” of the business, including the day-to-day expenditures and the near-term commitments, which can be:
    • Reduced;
    • Delayed;
    • Eliminated.
  • Strategic – analyze the business to restructure, redefine and prioritize projects, activities and expertise and skill sets to reduce costs and preserve competitive capability, as well as develop budgets and financial plans to reduce reliance on credit.

With the economy and the credit crunch with us for the foreseeable future, businesses need to stick with the basics – buy what you need and can afford. Rethink expenditures and have a plan to maintain firm control over costs and expenditures. Take it step by step. Establish a budget. When making a decision check to see what you have budgeted, if you must spend more than the budget or add an item to the budget, decide what you will cut to offset the added expenses.

Author: Lea A. Strickland, MBA CMA CFM CBM GMC

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