This article is Part 1 of a series outlining the 90 best practices of successful family and closely held businesses and the actions which allow companies to weather economic storms. The 90 best practices don’t necessarily appear in order of priority, and, due to your particular circumstances, some of the practices will be more or less valuable to your closely held company. They will not be presented as exhaustive analyses; rather, each article will touch on a few of the best practices with a very brief explanation. More depth on each of the topics is as close as doing internet research or making a phone call to The Family Business Institute. As you read the series of articles, please try to select the highest impact practices upon which to focus. Trying to get your mind around all 90 best practices simultaneously would be like trying to enjoy a drink of water through a fire hose!

The best practices will be concentrated in five distinct categories: 1. Cash flow, 2. Belt tightening & cost reduction, 3. Processes & systems, 4. Opportunities, and 5. What to avoid or of what to be wary. In hard times, the absolute, number one, unequivocal most important thing to do is to protect your cash, so that will be our launch point. We hope this series is beneficial in helping you prosper in tough times.

1. Focus on cash flow rather than paper profits

Cash flow seems like a simple concept, but it’s not. Cash is king in business, and no company can survive for very long without generating positive cash flow. Cash flow is defined as a company’s cash inflows minus its cash outflows over a given period of time. Most closely held business owners think of cash as revenue less expenses. This is simply not the case. To comply with generally accepted accounting principals (GAAP), financial reports and filings generate a great deal of “accounting static.” It’s quite difficult to tell from an income statement or balance sheet how a company’s cash is actually utilized and the condition of the company’s current and future cash flows. A profitable company doesn’t necessarily have positive cash flow, and a company with positive cash flow may not necessarily be profitable. Cash flow is one of the most commonly used terms in business, but it’s generally not very well understood – even by financial professionals – and it can get pretty confusing.

Growing companies find themselves in cash flow trouble because they usually have to invest money before they receive it in exchange for their products or services. For example, a farmer must utilize cash to improve or upgrade equipment, buy seed, and pay employees with the understanding that he won’t be able to sell his crops until several months in the future. As is always the case, investment comes first and return comes later (one certainly hopes). Relying only on income statements creates a false illusion; income statements tell how much cash a company will eventually create. If a company – especially a growing one – doesn’t have a well developed capability for predicting future cash flows, they’ll find themselves in trouble. Can a company go broke while simultaneously enjoying high profitability? You betcha!

In hard times, cash flow is paramount. Sales may flatten or even fall while fixed costs remain static. If sales fall below the point where the company is able to produce a paper profit, it still may not be time to panic IF the company has strong and stable cash flow. If the company cannot cash flow operations, it’s time to give serious consideration to the alternatives no matter how distasteful they may seem. Can a company stay in business while showing operating losses if they have strong cash flow? Absolutely! Family and closely held companies need to get ahead of the curve in hard times and intimately understand and predict their cash flows.

2. Collect accounts receivable

When we The Family Business Institute analyze clients’ financials, we are continually amazed at the condition of their accounts receivable. It’s not unusual to see client companies with an average collection period of 75 days or more. It may be okay to allow customers to pay in a leisurely fashion in normal times, but in hard times existing in that state simply means that you’re extending credit – often interest free – to your customers. Doing collections is an uncomfortable practice, and most family and closely held business leaders are genuinely nice people who hate to be aggressive or pushy. If you’re ever going to ratchet up your aggressiveness or pushiness with your customers, hard times are the time to do so! If you rely on a staff person to do collections, keep a close eye on days collectable. Whenever customer payments get out beyond one reporting period, jump into the situation yourself if necessary. In order to protect your cash, your company, and your family business’ future, you have to be ruthless and tireless in collecting accounts receivable.

3. Focus on lender relations, and keep them informed

Banks do not like surprises. Whether you’re doing okay or whether you’re experiencing some recession difficulties, now is the time to invest a few hours in keeping your banker informed. Make sure you adhere to all your loan covenants, and meet face to face with your banker regularly. Be sure your staff is sending updated financials to the bank each month. Your bank has a vested interest – especially in light of the turmoil in the financial services industry following the subprime boondoggle – in keeping you healthy. Work with your lender in a partnering rather than adversarial way to make sure they’ll be there for you if and when you need them.

4. Reduce tax payments

Most family and closely held business owners are focused on—if not obsessed with—avoiding taxation. Their focus, however, tends to be on personal and business income taxes. There may be other tax reduction opportunities available. Make sure you’re taking advantage of all available tax credits. Be on the lookout; Washington is now putt i ng togethe r a “stimulus package” which will potentially include small business tax credits. Take advantage of anything new. Make sure your internal or external CPA is using the most advantageous methodology for calculating quarterly estimated tax payments. If your profitability has changed and you’ve overpaid, file a claim for an IRS refund as soon as possible. Pay attention to real property and personal property valuations to make sure you’re not overpaying. Many areas have recently undergone real estate revaluations, and property values were recast at the market’s all time high. Whether you’ve just been through a revaluation process or not, you can always go to County Hall to plead your case that your property is overassessed and, therefore, you’re paying too much in tax. Don’t be shy; the success rate on this activity is quite high. Another area for attention is depreciation. Review fixed and leasehold assets to make sure they are being depreciated over their correct life for tax purposes. It’s often possible to reclassify certain assets in order to enjoy current rather than future tax deductions.

5. Know your break even point

A company’s break even point is the point at which a product or service stops costing you money to produce and sell and starts to generate a profit for your company. It tells you at what sales volume the variable and fixed costs of producing your product or providing your service is recovered. In hard times, you have to know what your break even point is because that is, in a sense, your floor level of sales. If sales fall below the break even point for an extended period of time, you’re in trouble. Every time you change the parameters in break even analysis, the break even sales volume changes. The parameters, then, are the factors which must be controlled by family and closely held business owners and managers. What if times are so tough that you’re not able to consistently hit your break even sales volume? See the next best practice for more…

6. Know your burn rate

Burn rates tend to be associated with newer or high tech companies. But in hard times, your burn rate is an important feature for mature companies who are struggling or are burdened with large amounts of debt. If companies burn cash too fast, they run the risk of going out of business. Burn rate analysis can tell owners and stakeholders whether a company is sel f - sustaining going forward or if the signals indicate that there is a need for shareholder or outside financing. Burn rate is a subset of break even analysis, and it asks the question “At minimal levels of sales activity, at what rate will I go through my available working capital?” It’s a more “skinnied down” number than break even; burn rate assumes that sales have dropped through the floor and that you’re facing a worst case scenario.

In every downturn, some companies not only survive but prosper. We earnestly hope this series will help you reach your fullest potential.

The 90 Best Practices for Recession Survival (and Maybe Prosperity): Part 2 

Wayne Rivers is the president of The Family Business Institute, Inc. FBI’s mission is to deliver interpersonal, operational and financial solutions to help family and closely-held businesses achieve breakthrough success.
January 2009