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2008 Year-End Letter

December 5, 2008

Dear Valued Client:

The recent credit crisis is just a reminder of the importance and benefits of having a sound strategy that you can use to navigate through turbulent times.  We have had so many beneficial conversations with clients over the past few weeks, and we want to remind you that you can contact us at any time for objective guidance in helping you make financial decisions for the future of your business.  In the meantime, below are some tips to help you assess your current financial condition and start rethinking your business plan to face the current economic challenges.

  1. Don’t panic.  It’s difficult enough to make sound decisions when you have a clear mind, but it’s even more difficult if you panic.  To get a better sense of where you stand, begin by reviewing your cash position and anticipated cash needs.  Are they in line with your business’ short-term needs, goals and risk tolerance?
  1. Take a fresh look at your monthly income and expenses.  Have you been meeting your budgeted projections (do you even have a budget prepared for use at times like these)?  How much of a drop in revenues can your business withstand and for how long?  What are your cash flow needs for the next 90-120 days? Or 120-180 days?  Do you have sufficient cash reserves for the next 30-60 days?  We can assist you with this process, and have been doing so for several clients recently.
  1. Check with your lenders on the status of your credit lines.  Are you in compliance with their terms?  Will your bank renew your commitments at similar amounts, rates and terms?
  1. Eliminate your reliance on credit by disciplining your spending.
  1. Refocus on your balance sheet and how much credit you are extending to your customers.
  1. If your credit lines are frozen or at their maximum limits, consider meeting with vendors and working out a schedule of partial payments that would allow continued delivery of critical materials and supplies.
  1. Look into alternative types of financing.  Some to be considered are loans on life insurance policies and loans from local government agencies or the SBA.  However, please consult your insurance advisor to discuss life insurance policy loans before utilizing one.
  1. Keep an eye on your accounts receivable.  Watch for new patterns of slow payments and follow up immediately.  Review your largest and riskiest accounts to determine whether credit constraint or economic slowdown will affect their ability to pay you.  Keep receivables aging current at all times.
  1. Manage accounts payable more closely.  Forfeiting early pay discounts may be more advantageous in preserving cash that may be needed for critical items.  Keep payables aging current at all times because that’s an important tool for managing cash.
  1. Analyze your expenses and determine which ones can be controlled.  Can you reduce spending in any areas to put less of a burden on your cash-flow needs?  As necessary, communicate to staff/team members about the need to tighten spending.  If you are a manufacturer, review inventory management practices.  Are there opportunities to reduce your on-hand inventory?  Service companies should make sure they’re capturing all their billable hours and invoicing promptly.  Have you billed all your contractual items?  How about all your pass-through expenses, such as billable third party expenses and travel expenses?
  1. Consider ways to pass your increased costs (fuel expense, for example) on to your customers.  If you haven’t analyzed your billing structure lately, now is a great time to do so.  Your costs may have increased for providing services whereas the amount you are billing your customers may not have.
  1. Check the safety of any cash deposits you have.  On October 3, 2008 the FDIC deposit insurance was temporarily raised from $100,000 to $250,000 per depositor through December 2009.  If you have more than $250,000 in any one bank, move the excess to another FDIC insured bank.  Consider investments to spread the risk of short-to-medium-term cash you may have invested in CDs.
  1. Don’t engage in panic selling your investments.  Make sure your portfolio is diversified and in accordance with your risk tolerance.  And, please make an appointment to speak with your financial advisor about your portfolio and his/her plans for taking you through this turbulent time.
  1. Come up with a plan now to respond to future declines in revenues, before they actually occur.  Re-think your business strategies and update projections.  Review your product/service lines to identify the most profitable items and determine how to leverage for future growth in profits.
  1. Contact your good customers.  Even casual discussions can lead to new business opportunities.
  1. Review all your insurance coverage, particularly from companies with weak balance sheets.  Be careful not to surrender a policy, as securing new coverage might require underwriting that can affect your coverage.
  1. Calm your employees’ fears about how this crisis will affect the company, their jobs and their retirement or other benefit plans.  Speculation and gossip are counterproductive, so it’s better to address their concerns directly.

Finally, remain focused on your own advantages.  Remember that:

  • As small businesses, we have greater flexibility and can more easily adjust to changes in the economy than our larger counterparts.
  • We small business owners can use the recent crisis as an opportunity to buckle down, refocus, assess and make our companies more financially sound, disciplined and less reliant on credit.

During tough times, it’s important to maintain contact with us, your trusted advisors.  Remember that you aren’t alone. As a small business ourselves, we have been through the same tough times, but I know that I haven’t seen conditions such as these in my career. We know and understand your business and the challenges you face, and we can work with you to navigate the turbulence ahead.  We can help you gauge your current situation in the wake of recent market events and create a sound business plan in response.  Contact us today for expert advice on how to maintain your company’s success.

Yours truly,

Jonathan I. Godwin, CPA