Even though housing starts continue to lag, many other signs point to the beginning of the long awaited economic recovery. This is good news! But beware; your business can fail just as easily during a recovery as a downturn.
Why does this happen? And how can you protect yourself?
The biggest reason for failure is financial. Just as many new businesses fail because they are undercapitalized, existing businesses have been seriously weakened financially by the downturn. Economy improvements and increased sales can put a severe strain on cash. Now is the time to shore up your financial team--your internal sources, your accountant, your supplier, your bank and your customer relationships.
Whether you have a bookkeeper, controller or CFO, they need to understand cash will be just as important as it has been during the downturn. Consider having weekly cash flow reports. This is also a good time to take a hard look at your accountant. If your accountant does only the minimum of what's required, like tax returns, you probably need a new accountant. If your accountant hasn't been with you during this downturn, regularly bringing you unsolicited ideas and advice, it may be time to move on.
A good accountant should have strong relationships with banks and be able to put you with the right bank, if yours isn't meeting your needs. He'll also be realistic with you about your credit needs and how much you can probably obtain.
Most of your suppliers have probably gotten through this with many of the same challenges as you. They are anxious to start growing again and probably now have fewer potential customers, so you are more important to them. Now is the time to talk with them about your plans. If you are open with them, they may be able to help ease your cash flow with solutions like better terms. They are more likely to do this if they feel comfortable with you and your business plan. It will be more of a challenge if you wait until a big order comes in and then try to negotiate with them.
It also helps to see how the bank sees your business, which is very different from how you see it. Get your financial statements in order, including year-end statements and tax returns. You may anticipate a big growth in sales revenue, but bankers aren't focused on your projections. Sure, they look at you, your plans and your place of business, but what they focus on are a few ratios from your balance sheet. If you don't understand these, make sure your accountant explains them to you.
If you extend credit, you need to be on top of this as it grows. Customers who get beyond-agreed-upon terms need to understand what you will do if they do not pay and when you will do it. You then need to follow through. Now is the time to work out a plan, perhaps with the help of your lawyer that lays out step-by-step what happens when a bill is not paid. This plan needs to be carried out consistently, with no breaks for good-old Henry.
The final area to keep in mind is margins. You will have pressure to take orders at lower margins. You will be tempted to accept these in an effort to keep the relationship or just for the volume. Resist this temptation with all your power. Once you reduce a price, it's almost impossible to go back up. You have succeeded so far for a reason. Sometimes your customer has to go somewhere else to appreciate why he does business with you.
Mark Mitchell is president and chief creative officer of Interrupt Marketing. For over 20 years Mark has focused on helping building material manufacturers to more effectively market their products through the channel of distribution including builders, contractors and retailers. Contact him at mark@interruptmarketing.