Knowledge@Wharton Contributors

If you’re running a small business today and aren’t thinking about how to tighten your belt, you are surely in rarefied company. But if you’re like the rest of us, you’re scrambling to cover expenses, pay bills and make payroll.

We asked Wharton lecturer and small business expert Robert Chalfin, about cost-saving strategies for small- to mid-size businesses. Chalfin is quick to point out that while there are no single solutions, there are numerous steps entrepreneurs can take to cut costs during the current recession.

“Think through the ongoing monthly expenses.” says Chalfin. “You could have a service contract you don’t need or can be reduced. You might have insured your computer equipment years ago when a PC cost $4,000 or sold some of the property that you continue to cover.“

Chalfin recommends reviewing your property and casualty insurance policies annually. Is your business properly classified?  Your business may have changed its focus since you purchased the original policy“ Invite, and insist, that your agent visits and tours the premises once a year,” he says. “Review your policies. Consider your deductibles and overall values. Do they represent today’s prices? Do you need business interruption insurance?”

Some other expense-saving strategies, according to Chalfin, include the following:

• Consider the utility of all employees as well as overtime payments. As a result of the slowdown in business certain positions and overtime payments may no longer be necessary or even needed.
• Review your health plan. “Do a little homework. Obtain competing bids every year, and don’t tell the insurance companies what you currently pay. Look at your deductibles. You may want to increase them. It may be worth it.”
• Ask for rent abatement. “If you lease your premises, ask your landlord about a rental abatement. Ask for some free months if you extend your lease.” Also consider if you can sublet any of your space or eliminate unneeded facilities when you renew your leases. “If you are responsible for common area charges these items may have declined. Inquire about these items as your lease may allow you to audit the landlord’s expenses.”

Chalfin is author of Selling Your IT Business: Valuation, Finding the Right Buyer, and Negotiating the Deal (Wiley & Sons, Inc.)

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For more information on cash flow management, see OPEN Forum’s “Managing Cash Flow through Trade Terms.”

If your business sees trouble ahead and has a bank loan outstanding, a workout might help take the pressure off. In a loan workout, the lender and borrower negotiate to ease the terms of the loan to try to help ensure that it can be repaid.

“You can always go in and rework a loan, especially these days,” says Lawrence Gelburd, a lecturer on entrepreneurship at Wharton.

Lenders will consider options that can reduce the risk of non-payment, particularly when you’ve developed a good working relationship over time. But even if you are working with a new lender, there is often a good business case to be made.

Terms of the loan that might be negotiable include the following:

• Interest rate;
• Payment amount;
• Payment schedule; and
• Loan covenants

Talk to your banker at the first sign of trouble. “Give your lender a chance to do the right thing,” says Gelburd, a former entrepreneur who advises small companies.

If you’re concerned that bankers will pull your loan in a knee-jerk reaction, don’t be, he says. “First, they’re so stunned that anyone told them the truth, they tend to like it. Second, their business is based on not having loans go bad. But you have to give them time. That’s the key.”

Before you call your banker to try to renegotiate a loan, get a fix on the source of your financial problem and come up with a plan to overcome it, whether it’s new marketing to increase sales or a new operations tactic to boost efficiency. Be prepared to provide three to six months of cash-flow projections but avoid painting rosy scenarios.

You may also want to consider getting help from a lawyer, accountant or a loan consultant. But don’t try to wing it, because bankers also will take your business-planning ability into consideration as they make a decision. They’ll also look at your track record, so don’t get behind on payments.

Many business owners wait too long before trying to renegotiate their loans.

“It’s sort of like going to the dentist. Everybody’s afraid to deal with it, so they wait until it’s gone bad,” says Gelburd. “If you don’t go in until it’s blown up, you have a problem.”

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For related content, see OPEN Forum’s “Building And Protecting Your Business Credit.”

Merchant cash advances — also known as business cash advances, and credit-card or charge-card receivables factoring – offer one more financing alternative for small-business owners seeking short-term working capital when strapped for cash.

While the cost of such financing is typically more dear than a bank loan or a credit line — credit-card factoring companies may charge rates of perhaps 30% — it may be worth looking into if traditional options are closed to you.

Credit-card factoring companies, often called factors, will look at your past documented credit-card receivables and advance you a percentage of your expected future credit-card receipts, usually on a short-term basis of less than 12 months.

“You might be able to get a $5,000 or $30,000 or $100,000 advance, based on your history of sales volume or credit-card sales,” says Lawrence Gelburd, a lecturer at the Wharton School and a former entrepreneur. A poor credit history isn’t generally a problem because the credit-card receipts provide assurance that the money is indeed coming in.

Factoring companies will work with any kind of merchant account, including charge cards. And businesses usually can get their cash quickly. Some factors advertising online promise turnarounds of 24 hours.

Merchant cash advances often are used by companies that typically have a lot of credit-card receipts, such as:

• Restaurants
• Retailers
• Service businesses

Unlike a loan, there is not a fixed amount for the repayment installments or a fixed term. The factoring company will collect a small percentage of your card receipts until the amount you owe (the initial advance) is paid back — often at a rate of around 8% to 10% of your sales coming in through charge or credit cards. But just because a factor offers you a deal, it isn’t necessarily wise for you to accept the rate, even if it’s a low portion of your ongoing sales. That’s especially true heading into a business downturn. read more

We asked Wharton professor and author Stew Friedman how employers could integrate their personal and work lives to find a productive and comfortable balance. Tough as it is any time, balancing the two can be a huge challenge in a recession when challenges seems to spring from every corner.

After all, work isn’t everything. On the other hand, some of us are more attached to our careers than others. And we don’t all have the same outside commitments or interests.

So, how can you achieve your own best mix of the personal and professional? Most important, says Friedman, is to articulate your goals, get feedback and clarify what matters most to you. He offers the following tips:

1. Describe your legacy. “Write a short piece, one page or less,” says Friedman.  “Fifteen years from now, what legacy do you want? What impact do you want to have on the world?” Take a little time and write down where you want to be in 15 years – professionally, personally, spiritually, financially or in whatever way you see it.
2. Learn what people expect of you. List the 10 most important people in your life. Note what each one expects of you and how you’re doing at meeting their expectations. “Ask yourself how these expectations affect one another, so you begin to see your life as a system,” says Friedman. Then, have a conversation with each one. “This is the part of the process that tends to frighten us,” he says. “Most people approach these talks with trepidation because they are afraid of what they will hear.” But the good news is that most people’s understanding of what others expect of them is not quite accurate. “We tend to overestimate,” says Friedman. “People don’t expect as much from us as we think they do. In my experience eight out of 10 people discover that what others expect from them is a little less than what they had presumed.” Armed with a realistic sense of what people expect from you, you’re likely to have more time and energy for your own pursuits. read more
   

Factoring is one option to consider when searching for short-term financing alternatives for your small business. As an asset-based financing arrangement, factoring allows you to sell your accounts receivables or invoices to a specialized financing company — called a factor — at a discount. Typically, the factor will pay between 70% and 90% of the value of the receivables and then take over collection efforts.

“Factoring can benefit just about any business,” says Lawrence Gelburd, a lecturer at Wharton Entrepreneurial Programs and a former entrepreneur who advises small companies. “It’s another way to go to a lender and be able to say, ‘I’m not just asking for a small-business loan without any collateral.’”
Factoring has been around a long time. It has had a rather tinged reputation due to its history with shaky garment-industry companies and its association at times with less-credit-worthy businesses. But factoring is getting more attention amid the credit crunch. One reason for its higher profile: It’s turning up on Internet searches by business owners exploring new sources of financing.

“Traditional receivables financing is better known because of the Internet,” says Gelburd. “More business people are talking about these options than in the past.” read more

Communication is essential, but so is good judgment

When the going gets tough, even the tough stick their heads in the sand sometimes. For example, when a small business grapples with its cash flow and can’t pay vendors on time, the boss might be inclined to ignore the problem in the hope that it will go away on its own.

Usually it won’t – and the ostrich-like behavior will only make the situation worse.

Eric Siegel is an adjunct lecturer in management at Wharton School and president of Siegel Management, advisors to middle market growth companies. He offered some advice on how to talk about money with vendors during recessionary times.

“I think communication is normally a good thing,” says Siegel, noting that some of us have a tendency to duck unpleasant calls and discussions, which, he says, only antagonizes people.

“So, with some exceptions, it’s a good policy to take calls from vendors about their invoices and sometimes even preempt their calls.”  On the one hand, Siegel recommends telling the vendor that – for example – you’re in a tight cash flow period and will need to switch from paying every 30 days to a 45-day schedule. That sort of proactive communication, he says, “will win friends and help with the bonding of vendors.”

On the other hand, he says, “You shouldn’t use that as a blanket policy. There could be adverse implications.” A crucial vendor could decide they don’t want to take the risk that you’ll go out of business and leave your bills unpaid. They may insist on shipping COD instead.

What to say to vendors – and when to say it – is a question of culture and climate, says Siegel. Before picking up the phone to talk turkey with a vendor, ask yourself what kind of relationship you have with them. Are there feelings of trust?  “If so, “ he says, “sharing financial information can be useful.” read more

In today’s economy, many small and mid-size companies lack sufficient cash reserves to ride out the storm. Finding new customers is tougher than usual. And, as you know, raising prices isn’t always an option.

So, how can you best manage your company’s cash?

We asked Eric Siegel, adjunct lecturer in management at the Wharton School and president of Siegel Management, for some tips on how small business owners can net more cash without raising prices or alienating customers.

Here are Siegel’s five recommendations:

• Manage your receivables. “See if you can turn your receivables quickly without antagonizing customers,” says Siegel. “Call them and tell them what you’re up against, and arrange more favorable terms.” Especially if you know your fees don’t put a big dent in the customer’s budget, Siegel recommends reminding them you’re not a big creditor. “Ask them, ‘What can we do to get me paid more quickly?’ If you can persuade customers to pay quicker you improve your receivable balance. This creates more money.”
• Establish terms up front. When Siegel’s firm picks a new client, he sends them an engagement letter that spells out payment terms, so there won’t be confusion later on. “Set the ground rules up front in terms of when payment is required, when a late fee will be assessed.”
• Analyze inventory positions and manage them down. Growth doesn’t always improve revenues. Siegel once had a client who manufactured overcoats. “He bought his orders in the spring, manufactured in the summer, shipped in the fall and collected at year end.” The manufacturer tripled his business in a year. Sounds good, right? Not necessarily. “In the spring and summer,” says Siegel, “he had to fund a lot of production and manage a lot of receivables. In such a case, you can grow yourself into bankruptcy.”
• Manage vendor relationships and stretch accounts payable when there won’t be adverse consequences. “There are some kinds of debt that are tough to manage, like bank loans,” says Siegel. If you don’t pay on time, or the ratios on your statements aren’t conforming to your projections, a small business can get itself into trouble. But there is also “trade debt,” which Siegel says is often easier to manage. Again, he says, it’s a matter of getting on the phone. “Call your suppliers and ask for a longer payable period. Tell them ‘we need to go from 30 days to 45.’”
• Re-examine your vendor relationships. Make sure the costs are right. “Say you are hiring a lawyer,” says Siegel. “Find one who wants to be in on the work you are doing. Find one who is willing to fix price it. They want the work, they want a hot new client, plus we’re in a recession.” He also advises going to professional service providers where there is not a sole source (such as electricity) and asking if they will cut prices. “Say ‘I want to work with you. Right now I have to squeeze you a little, but it won’t always be this way.’”

If you can manage your business in such a way that your income is ascending, Siegel says that may be an answer to your problem. But, he says, like the overcoat maker, “There could be an extended period of time where increasing income reduces cash flow because of money tied up in inventory and receivables.”

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For more information on cash flow management, see OPEN Forum’s “Managing Cash Flow through Trade Terms.”

Not everyone who runs a business is a financial wizard. And why should they be? People go into business for a variety of reasons – to transform something they love into something that pays; to honor a family tradition; or for the freedom of working without a boss – not necessarily because they’re good with money.

Yet, a company’s financial operations are key to its success. That’s why Eric Siegel, an adjunct lecturer in management at Wharton School, believes that any entrepreneur who doesn’t understand finance ought to hire – or, at the very least, consult with – someone who is.

Siegel, who is also president of Siegel Management, a firm that provides strategic support to middle market growth companies, offers these best practices in finance for entrepreneurs who run small and mid-size organizations:

• Get busy forecasting. “If you don’t know what your need is, how will you address it?” asks Siegel. “You understand your needs by forecasting cash flow, which is different from income or a balance sheet. It is cash flowing into and out of the business.” Siegel recommends projecting cash flow by the quarter. “But it’s even better if you can do it monthly,” he says. For example, on January 1 you have $100,000 in the bank. You’ll have money coming in and money going out. So, on February 1 you project that you’ll have $400,000. Now, by projecting how much money will flow into and out of the business month after month, you can see that your low point will be August 1, a couple of months before your big customers pay their bills. You project that on August 1 you will be down to your last dollars. In that case, you’ll need some financing.
• Anticipate the need early. “However long you think it will take you to raise funds, it will take you longer,” warns Siegel. “Even in more robust times, things come up, you may have to wait. A loan officer could be on vacation. So anticipate the need as far into the future as you can.”
• Economize. Some people think the more money you raise the more you succeed. “But that’s not true,” says Siegel. “Can you lease, not buy? Can you maybe pay some people in equity? Do you offer perks that offset high salaries?”

According to Siegel, some people have a propensity for talking in financial terms, while others – typically, creative or sales types – just don’t look at the numbers. “Some business owners are like the guy who doesn’t want to visit the doctor because he might hear bad news,” he says.

Bottom line for entrepreneurs: Don’t be that guy!

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OPEN Forum invites you to also take a look at “Building And Protecting Your Business Credit.”