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Be proactive with finances to survive tough market

Lance Fenton

Lance Fenton

We all know and sorely miss the “good old days” in which a business owner was able to call his or her banker and ask for more money to purchase assets for the business. The expectation was that the money would be in the account by the time they hung up the phone.

With the regulatory agencies playing a more active role and the economy reducing lender confidence, the approach has been a bit different. Now when a business is making the same request, the process involves more documentation. Decreasing market property values, a balance sheet reflecting less favorable debt to equity ratio, and reduced gross revenues make a company previously viewed as a good credit risk seem less favorable. The result is a need for critical changes in business practices.

Truth be told, this was a wakeup call to many business owners who weren’t engaged or as interested in the financial side of their business. Accounting was done for compliance reasons rather than using it as a management tool. Consequently, instead of reviewing a financial statement by comparing it to a prior year and analyzing the changes, it wasn’t reviewed or discussed but tucked away in a filing cabinet.

As a result, businesses are now left with the question: “How do we fix this?”

Our economy has been here before and we had to re-learn techniques that made us successful in the beginning. How will businesses manage their financial operations smarter, more efficiently and more collaboratively?

Let’s explore some of the challenges business owners currently face and what solutions are surfacing.

Business vulnerability

Due to large equity reductions and decreasing market values, most businesses are “under water” on their property and business loans. Highly leveraged businesses are receiving “special” attention from their banks and it’s not the attention most businesses want.

Many business owners are being required to do things they’ve never done before. For most, credit is the biggest hurdle right now. Many banks are only extending credit for short periods of time, at higher interest rates, and with additional scrutiny of the business’s operations.

While this adds a great deal of stress on a daily basis, the oversight demands current financial information. This is not only where your accountant comes into play as an active adviser but also your banker and attorney to assist with negotiating loan terms, developing and agreeing to operating budgets, and developing a plan to achieve compliance with loan covenants.

The business owner who does not take note of changes that need to take place in his or her business may not survive the current conditions. We feel that it is necessary to budget and take an active interest in your financial position from the cost of sales to profit management.

Manage your business

Most businesses have operating budgets that are developed annually by the business owner and reviewed on a frequent basis throughout the year. An active business owner will review a profit and loss statement with a trusted adviser, typically an accountant, on a monthly basis. They will compare actual results to budgets, analyze variances, and make appropriate changes. If an adjustment needs to be made mid-stream, it should be done immediately.

Before today, many business owners would approve, half-heartedly, budgets prepared by the banks and only look at them as they were signing the annual loan extension. The owner was not vested in the budget because it appeared only to be a formality rather than a tool that could be used to evaluate the business. Today, banks are requiring budgets to be prepared, thoroughly reviewed, and approved by the business owner. Many banks are requiring a monthly reconciliation of the variants between budgeted and actual results.

Additionally, to stay in compliance, many business owners are required to provide monthly financial statements which were previously only needed on a quarterly, annual or as-needed basis. These statements are usually provided by the certified public accountant because the bank needs more assurance that the financials accurately reflect the records.

Your financial team

We know as CPAs we cannot or should not tell you how to perform your daily operations. That is your expertise, not ours. However, we do work with many different business owners and prepare a significant number of financial statements. From that, we can help you see where your financial statements and operations may be different from the average, whether it is above or below the average.

Our perspective is different, just like yours is, as well as the bankers’ and the attorneys’. This collaboration is a critical tool in order for you to plug the holes in the ship. Meeting on a quarterly basis with one or all of these individuals allows you to actively check and find the right balance for your operation. These meetings are not a new idea, but having an active agenda and engaged and informed participants at the table will be of benefit to you.

Financial health

We’ve covered a lot of ground and yet this is just the beginning. Financial health in any business is just as critical as the service or product your business provides. With that said, remember, you are not alone. Surround yourself with the best team of professionals you can find. This will help you survive a tough market.

Some of the best solutions to current financial issues are derived from collaborative efforts and compromise from all parties. Ask the hard questions of your financial team. You should see your accountant, banker and attorney as your advisory board, not your adversaries. By doing this, you will create a business environment in which you can make timely, informed and strategic business choices.

This article was written by Lance S. Fenton, CPA and partner at Cooper Norman Certified Public Accountants in Boise. For more information, or if you have questions, contact Elina DiCostanzo at Cooper Norman at (208) 336-0800.

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