Volume 5, No. 6
August 2009


Local Restaurateur To Lead National Association

"Addressing Difficult Financial Times - Alternative To A Permanent Reduction In Force." By Mel Muskovitz

Small Business & The Internet
"Phoning in a Mea Culpa""
By Mike Gould

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Ann Arbor Area BUSINESS MONTHLY magazine brings the reader the latest business news and information important to the businesspeople in Washtenaw County. Each month articles cover real estate, legal, Internet, employee concerns and the climate of business in the greater Ann Arbor area. There is news about company employees and feature articles on local businesses. We cover business news from Ann Arbor, Chelsea, Dexter, Manchester, Milan, Saline, Whitmore Lake, and Ypsilanti.

Charlie Crone

Charlie Crone, First Vice President Commercial Banking at Bank of Ann Arbor.

Tough Times Call
For Clever Financial
Business Planning



By Mark Ziemba

Planning business finances got a lot harder in 2009. While never perfect, business budgets recently haven't been able to rely on historical performance to create an accurate financial framework because the economy has dropped so drastically in the past year.

In June, "Business Finance Magazine" even went so far as to announce the death of the corporate budget process, itself. Although such a radical notion may be a bit premature, the economy has undoubtedly challenged the traditional business budgeting process.

Now more than ever, smart financial business planning can help business survive and even thrive.

Realistic Financial Planning: Using Budgets or Cash Flow Projections

Realistic financial planning helps businesses plan more effectively, whether they rely on traditional approaches or more fluid ones.

Budgets are typically the basis for financial planning, and preparing them more realistically can make them more useful.

Most importantly, monthly figures should take fluctuations into account.

"It shouldn't merely be an annual number for each revenue and expense line divided by 12," says Bank of Ann Arbor Commercial Banking Group First Vice President Charlie Crone. "Patterns should be looked at; seasonality should be considered."

Budgets should also be regularly evaluated.

"As part of the process of financial management, the results compared to budget for the month and year-to-date should be thoroughly evaluated and discussed," says Crone.

Budget evaluations should be factored into forecasts. Forecasts for the rest of the year and even further out are presented part of the way through the fiscal year.

Budgets aren't always the best financial management tool, however.

The controller for Ypsilanti commercial contractor A.F. Smith Electric, Mark McComb laughs when asked how useful recent budgets have been.

"It's tough in this economy to even try to budget anything," says McComb. "The whole budget and forecast went out the window about 18 months ago," he says. "No one really even has a budget in our office anymore," he says.

McComb says that they sit down and look at items as they come up on a case-by-case basis, asking if they really need to spend money on that at that moment.

"We'll make the decision almost on the fly," he says.

"Cash is king right now," says McComb. "Without good cash flow, you're not going to be able to survive these down times."

McComb's emphasis on cash flow suggests the value of another key financial management tool: the cash flow projection.

"Cash flow projection may be more useful in these times than a budget," says Jim Bennett, principal at Ann Arbor accounting firm Weidmayer, Schneider, Raham and Bennett. "Sometimes it's hard to budget sales in this kind of environment. If you can have a rolling 30- or 60-day cash flow projection, that will help you avoid getting blindsided."

How is a cash flow projection more useful than a budget?

"A budget really models the whole profit-and-loss statement," says Bennett. "The cash flow projection just models your cash balance as it goes along. In these times, cash equals survival."

Bennett adds, "A budget will recognize recognize sales when the sales are made, usually. A cash flow projection only includes when they are collected."

Also, he says, "Budgets tend to recognize expenses when they are incurred. You want to have a projection of when you're going to have to pay them."

This approach can be particularly helpful if cash is getting short, says Bank of Ann Arbor's Crone. He adds that a rolling cash flow projection is updated on a weekly basis. He explains that this approach simply asks, "What's our cash position?"

If the cash position is getting uncomfortably low, Crone says, that may suggest a need to increase cash flow or cut expenses.

Increasing Cash Flow

The obvious answer to the pressures of a difficult economy is to effectively manage corporate finance by increasing cash flow. There are a few ways to do that.

Good service can maintain current customers and help bring in new customers, helping to maintain and grow the cash flow.

A.F. Smith Electric's Mark McComb says that they have been focusing on marketing their high-quality service to help them stand out from competitors, which are increasing in number.

"When times are tough, you're getting a lot more competition," says McComb. "Everyone wants a piece of a pie that's small."

"We're trying to distinguish ourselves with quality work," McComb says. "We know we have some of the best and fastest working electricians in the union."

Marketing helps keep businesses on the minds of their customers, adds McComb.

Bennett of Weidmayer, Schneider, Raham and Bennett accounting firm says, "You could look at advertising: keeping that steady or increasing that a little bit if you think you can take some market share from weaker competitors."

Bank of Ann Arbor's Crone agrees that pursuing new customers is still important. "In a down economy, it may be very difficult to increase your revenue and gain new customers, but you certainly don't want to give up on that."

While lowering prices might help make a business more attractive to potential customers, maintaining pricing helps keep the cash flow from decreasing.

"You want to maintain your pricing discipline. You don't want to acquire new business at a loss," says Crone.

Crone also suggest paying close attention to working capital (current assets minus current liabilities) in order to increase cash flow.

Managing accounts receivable assets can help bring in more money, says Crone. The more a business can collect sooner, the more cash on hand the business will have for current liabilities.

"If your terms are 30 days, make sure you follow up on the 31st day," says Bennett, "if you're not getting payment."

Maintaining an optimal amount of inventory assets can also make a positive difference. Crone explains that if customers can still be effectively serviced with a reduced inventory, that also adds more cash on hand.

Working to ease current liabilities can also help increase cash flow. Respectfully negotiating longer terms of payment with willing vendors can also keep cash on hand, says Crone, crucial when money is tight.

Bennett notes, "Now is not the time to be too proud to admit you are running into some cash flow issues and need to extend payment terms."

Cutting Expenses

Reducing costs also helps properly manage business finances, and there are some good tips for handling those in today's economy.

A.F. Smith Electric Controller Mark McComb says that his company is putting off unnecessary projects.

"If it's not mandatory, we're not doing it," says McComb. "If it's not needed today, we'll wait until tomorrow." He says "We've had to cut costs in house, delaying any major purchases of vehicles, computers, information technology."

Reducing personnel expenses can make a big difference, too, and there may be ways to do this without laying off staff.

"Personnel is usually the largest cost," says Jim Bennett of Weidmayer, Schneider, Raham and Bennett. "You might look at across-the-board pay cuts," he says, as a better alternative to layoffs. Explaining these options might help employees react to pay cuts more positively.

Restructuring benefits may help cut costs too, as A.F. Smith Electric has also done.

Keeping commercial debt low also helps reduce expenses. A lower principal means a lower monthly interest payment.

"Any debt increases your overhead, and increases the amount of sales you have to make every month to make that payment," says Bennett. "The lower the debt, the better."

You may also be able to negotiate with the bank on existing commercial debt to temporarily reduce expenses.

"See if you can renegotiate interest rates, or for a period go to an interest-only payment," says Bennett.

Some more creative solutions for cutting expenses might help, as well.

"If there's space that you're not using, could you let the landlord shop that and see if anyone else can use that space?" asks Bennett.

You can also try to negotiate a lower rent.

"It's a very weak real estate market right now," says Bennett. "Could you work with your landlord to reduce rent payments?"

Bennett also suggests the novel solution of seeing if quarterly estimated tax payments should be reduced.

"If what you owe looks like it will be a lot less than last year because of lower profit, certainly look at your estimated tax payments and see if those can be lowered," says Bennett.

Commercial Loan Possibilities

Businesses may want to consider commercial loans to assist with managing finances, but companies should approach them with an appropriate mindset.

"Going to a bank and borrowing money to fund losses is in itself not a good idea," says Bank of Ann Arbor Commercial Banking Group First Vice President Charlie Crone. "You have to be able to demonstrate why things are going to turn around and those increased borrowings are going to be repaid in a short period of time."

Otherwise, Crone says, "Any debt incurred should be for productive purposes with an identified source of repayment."

While commercial loans are not a long-term loss solution, small businesses looking for short-term solutions to loss might want to consider a new government-authorized Small Business Administration-backed program called America's Recovery Capital (ARC) loans. ARC loans are made by SBA-approved commercial lenders through the program, which just started in June.

The ARC loan program is a deferred-payment loan of up to $35,000 towards principal and interest payments on current qualifying loans. It is available to for-profit small businesses suffering immediate, temporary financial hardship, with at least one year of profitability or positive cash flow in the past two years and viable future cash flow projections for the next two years. The program requires documentation of financial hardship, includes difficulty making payroll, rent, or loan payments, or declining sales or frozen credit lines, among other situations. Qualifying loans include secured and unsecured conventional loans, capital leases, SBA Capital Development Company/504 program first mortgage loans, business credit card obligations, and payments due to vendors, suppliers or utilities. Advantages of ARC loans are that they are interest free for the borrower (the interest at prime plus 2 percent is paid to the lender by the SBA on behalf of the borrower), allow a 12-month deferral period and offer a 5-year payment term on the principal.

For companies that are fairly stable, commercial loans might help them take advantage of the current economy.

"For those companies that are well positioned and are looking to expand market share during these times, additional borrowing may make sense," says Jim Bennett of Weidmayer, Schneider, Raham and Bennett. "Rates are relatively low."

To prepare for traditional commercial loans, businesses should make sure they have the last few years of financial statements and projections handy.

Crone says, "If the loan is secured by real estate, the bank is going to have some sort of appraisal or evaluation of the real estate."

For loans to be backed by real estate mortgages, says Crone, banks look at debt service coverage, or "the adequacy of the cash flow to repay the loan," and the collateral, or loan-to-value ratio.

A difficulty with real-estate backed loans is the recent poor performance of the real estate market. Without adequate comparables, estimated values are much lower and getting credit is harder. Banks look for a lower loan-to-value ratio.

"Even if the cash flow works, the collateral value could be such that there's such a high loan-to-value that the bank would be unwilling to make the loan," says Crone. He points to the SBA 504 loan program and opportunities through the Michigan Economic Development Corporation that may assist in decreasing the loan-to-value ratio.

"Those are very good tools, especially in times like these," says Crone.

Managing Finances in Tough Times for a Better Future

Although the national, state and even local economies are suffering, financial discipline will help now, and leave businesses better prepared when recovery finally rolls around.

Looking at the unemployment rate paints a generally bleak picture. While the seasonally adjusted June unemployment rate for the nation was 9.5 percent, Michigan's rate was 15.2 percent, the highest in the nation. The latest available figure, Washtenaw County's seasonally unadjusted unemployment rate in May was 9.1 percent, close to the national rate.

"Washtenaw County has the lowest unemployment rate in Michigan buoyed largely by the University of Michigan and two major health care systems," says Charlie Crone of Bank of Ann Arbor. "This is the best place in the state of Michigan to be doing business right now."

"Many local businesses are facing the most challenging times in their histories," says Crone.

Practicing the financial management needed in this economy will reap rewards however.

"If you can get through this time in fairly good shape, you'll have the reserves and the ability to borrow," says Jim Bennett of Weidmayer, Schneider, Raham and Bennett.

Bennett suggests this mantra: "Keep your overhead low and don't stop selling."