In these financial conditions, small business owners need to focus more than ever on the basic fundamentals of business operations, including the management of key relationships, controlling accounts receivables, avoiding wage and hour traps, and managing relations with customers, lenders, and landlords.
Managing the entity’s relations with the outside world is crucial in an economy where money is tight, nerves are raw, and a strategic partner here today may be gone tomorrow. The easiest and perhaps most important relationship to maintain and even improve on is often that with your bank, which leads to Rule No. 1:
Rule No. 1: Hug Your Banker.
With money hard to find, it is imperative to make sure your banker is on your side now and in the future. Pull out your loan documents on the line of credit, review the “Events of Default” section, and make sure that you are in compliance. Next, polish the balance sheet and cash flow statement, and then call your banker and take him or her out to a working lunch to describe how well the company is doing, how great the balance sheet looks, and all the wonderful things the Company is going to do in the future. For good measure, increase the cash balance in your operating account to something in excess of your normal average balance; nothing eases a banker’s concern more than cash on hand, especially if they have cross- defaults in their loan documentation and have the right to collect from the operating account. The last thing a business needs now is to have a line of credit pulled suddenly by a bank nervous about something that could have, in retrospect, been handled with a phone call, a personal visit, or some other TLC.
Which leads to Rule No. 2:
Rule No. 2: Manage Your A/R.
In connection with buffing and polishing the balance sheet, take control of the accounts receivable. Implement strict credit controls and, when customers exceed their credit limits, immediately put them on credit hold, deliver product only on a cash advance basis, and enforce late payment charges. That way, your invoice will go to the top of their accounts payable pile. For new customers, try to include personal guarantees and security agreements in the initial contractual agreements while everyone is excited and hopeful about the new relationship and will sign anything. Trying to get such documents signed if and when the relationship is souring and the customer is short on funds is much more difficult. As any bankruptcy or work-out specialist will tell you, your chances to collect on a past due account in an insolvency or bankruptcy improve greatly when you are a secured creditor and have a guarantor or two on the hook for the unpaid balance.
Rule No. 3: Don’t Neglect Corporate Housekeeping.
If you are a corporation, make sure you are observing all of the corporate niceties, including the preparation and filing of Articles of Incorporation, the payment of corporate taxes, holding the required shareholder and board of director meetings, etc. Equally as important is to make sure you are avoiding the pitfalls that can result from disregarding the corporate form. Commingling of personal and corporate funds in the same accounts, gratuitous personal use of corporate property, maintaining inadequate capital (or insurance) to cover reasonably anticipated liabilities, are all examples of factors typically relied on by courts to “pierce” the corporate veil and impart personal liability on the owners.
A corollary to Rule No. 3 is to avoid lawsuits for overtime, discrimination, and wrongful termination. In this economy, it is prudent to assume that lay -offs are a distinct possibility, if not an inevitability, and prepare accordingly. Terminated employees are potential plaintiffs; do what you can now while the employee is still happily employed (and is “gruntled”, as employment litigators like to say) rather than waiting until the employee has been laid-off and becomes “disgruntled.” Make sure no non-exempt employee is working more than eight hours in a day or forty hours in a week without receiving overtime. For those employees you have classified as exempt, make sure that they really are exempt and that their job duties haven’t changed and made them non-exempt. To avoid claims of discriminatory animus in lay- offs, ensure that all employment decisions, including terminations, are based on non-discriminatory reasons, and have such lay-off decisions vetted by Human Resources or, even better, the company’s attorney.
Finally, without our customers, we would not be in business, which leads to the last Rule.
Rule No. 4: Love Your Customers.
Make sure your best customers “feel the love” and know that they are appreciated, that their every need and concern will be immediately addressed, and that “the customer is king.”
Follow these tips, tighten the belt, gird up the loins, and we’ll all get through these difficult times.