It seems all we see lately on television or in the newspapers is bad economic news. Financial institutions are failing, the stock market is tumbling, the national debt is at an all time high, housing starts are plummeting, millions of people are losing their homes, and the jobless rate is soaring. Some analysts are even comparing our current economic situation with the Great Depression. As if it isn’t hard enough to run your business in good times.
So what can a business owner do to stay afloat and ride out the storm? Think liquidity. Liquidity, by definition, is a measure of your ability to pay debts when they are due. It is usually expressed as a ratio or a percentage of your current liabilities. The best liquidity measuring stick is called the Quick Ratio. It is calculated by adding up the cash available in your checking and savings accounts plus the money your customers owe you in accounts receivable. Then you divide it by your current debts. A great Quick Ratio is 1:1. This means for every dollar of current debt you have a dollar of liquid assets to pay it. A liquid asset is cash or very close to being cash. You might notice that your inventory isn’t considered in the Quick Ratio. That is because you have to sell it before it becomes cash. You can’t pay your bills with inventory.
The key to staying liquid is to focus on where and when you spend your money. Try to avoid purchases of equipment, machinery, vehicles, and excess inventory unless absolutely necessary. And please resist the temptation to pay down extra principle on any term loans with the bank. Keep the funds in the bank in case things get even worse. Now back to our depressing economy. When things get tight, consumers get nervous and lose their confidence. This causes them to reign in their spending habits, which can cause the sales of your small business to decrease. Right now, if your sales are increasing, you are a hero. We all know that when sales fall so do profits unless you can cut expenses. Here are some strategies to use when you need to tighten your belt. The first deals with overtime. Effective business owners can virtually eliminate overtime with proper planning. If not, they need to pull an extra shift or two themselves. Watch your purchases. Sure, you need to replenish your inventory of goods, but quantity and timing considerations are critical. Order more frequently and in smaller quantities as long as you meet minimum order requirements set by your vendors. Merchandise in the stock room only ties up your cash. Watch how you pay your bills. Some vendors offer a two percent discount if you pay the invoice within ten days. Take it. If no discount is offered, pay the invoice as late as possible, but make sure the payment is received by the due date. No late fees. They cost you money and affect your credit. Send out statements to customers owning you money in a timely manner. Follow up promptly with a phone call if payments aren’t received according to the agreed upon credit terms. Be sure to refocus you waste control efforts. Get it right the first time to avoid remakes. Enforce quality control standards. Rotate that stock. Make sure your merchandise is priced right. Perform preventative maintenance on
your equipment and machinery to cut down time and extend the useful life. We promise the sun will come out again. It just might take a little time. Keep in mind that small businesses have been the backbone of our economy for the last 30 years while corporate America sputtered. You should all be proud of your efforts and keep up the good work!