As the U.S. Government rescues giant financial institutions and automobile makers and proceeds with a mammoth stimulus package to save our economy, it does not come as a surprise that many small businesses are struggling. A small business owner needs a plan for survival. Part 1 of this article reminds you of the basic strategies: cutting costs; cash flow; advertising; and income tax planning. Part 2 of this series considers three less measurable factors that contribute to small business survival.
1. Cutting Costs
Even if you feel that you are saving every penny, there still may be cost-savings measures from which your company can benefit. Examples include:
– Postpone major purchases, if possible. Financing may be difficult, if not impossible to obtain and the terms may not be favorable.
– Buy used equipment for cash.
– Raise insurance deductible.
– Use independent contractors instead of full-time employees.
– Do some things yourself that you now pay others to do. E.g. write content for your website instead of hiring someone else to do it. Finish up a project yourself instead of paying an employee overtime.
– Take advantage of any discounts that suppliers allow for early payment.
2. Cash Flow
Carefully track your cash on hand on a daily basis. Use a simple flow chart to forecast expected incoming and outgoing items. It does not have to be computer-generated or fancy. Even a simple list of expected payment dates can be helpful in maintaining cash flow. Accessing the online statement is very helpful because items are posted to the account on a daily basis.
Place your company in the best position to collect fully from all customers. For example, ask for larger advance payments to compensate for the increased costs of materials and labor. Clearly set due dates for payments and follow up on them promptly. If your fee arrangement is payment upon pick-up or delivery, then advise the customer in advance that you will be expecting a check at that time. Some small business owners are reluctant to ask customers for payment. Resist the urge to procrastinate your collection efforts.
Consider using small claims court to collect past due payments. Once you go through the procedure with one customer, future claims easier and less time-consuming because you already know the process and perhaps the judge. Take into account that there are filing fees and other expenses associated with making a claim. Also, the judge may ask you to compromise. Even if you do not recover the full amount in small claims court, recovering a significant amount may be worth the effort.
As the owner of a struggling business, you may have to sacrifice personally by taking a lower salary in order to leave more cash in the business. Take only enough to cover the needs of you and your family. Some companies have even paid employees late or asked employees to take a smaller wage. Explain to the employees that, if the business remains open, they have a better chance of maintaining employment rather than competing with countless other unemployed individuals for too few jobs.
Limit your inventory. If a supplier sends you the wrong material, return it immediately instead of keeping it in inventory for some potential future use.
3. Continue Marketing
Experts agree that you should not stop marketing in a downturn. If you can’t afford to spend more, find more effective ways to use your advertising dollar. Rely on local networking and word-of-mouth. Depending on the type of business, social networking on the web may be an inexpensive way to pick up additional customers. You could improve the searchability of your website to make it more visible to the big search engines.
4. Income Tax Considerations
Carefully record each expense, however minor, to deduct on your income tax return. Even relatively small expenses can result in a significant deduction when cumulated at the end of the year.
Hire your spouse or your children. When you pay them, the business can deduct their wages as business expenses.
If your situation is so bad that your expenses exceed your income, take advantage of the deficit by deducting it as a net operating loss. A net operating loss can be carried back for two years prior to the loss year. The result of a net operating loss carryback is a present tax refund of all or part of the taxes paid during the carryback period.
Remember the basics when the economic climate is uncertain.
50 Ways to Save Money in Your Business, Economic Downturn Survival Guide, Entrepreneur.com
Phillip Mydlach, Leadership: Prepare your company to survive recession, BizTimes.com (Jan. 9, 2009)
Carol Tice, Bounce Back: With a little common sense and a lot of hard work, your business can boom in any economy, Economic Downturn Survival Guide, Entrepreneur.com
C.J. Prince, Stay Out of Trouble: Before you decide to call it quits, consider these tips for getting your business through tough times, Economic Downturn Survival Guide, Entrepreneur.com
Managing a Business, Arkansas Small Business and Technology Development Center
U.S. Small Business Administration Website