Managing Your Credit in a Recession

In my summary article, Top 10 Business Issues For 2009, I stated that the global economic crisis had changed things in a structural way, and we will not return to the way we have done business in the past. This next series of articles will expand on the top 10 list originally published.

Obviously, the place to start is with credit.

Every business needs credit to operate. Some rely on credit more then others and that is now a less comfortable place to be. So here are some things to think about when making management decisions regarding money and credit.

Reduce your need for credit as much as possible. Now is the time to look hard at your cash flow. But, be careful where you cut spending. Some places cannot afford to be cut off. For example, your core operations will need to be funded, especially marketing and anything that will bring innovation to your product or service line. Your customers are facing new problems as well. Show them some innovative solutions. When this recession ends, and it will, you need to be in a stronger competitive position then you are right now.

One underused way to conserve cash flow is to monetize unused products or services through barter. It is estimated that over 350,000 businesses in the U.S. are involved in barter exchange activities. There are hundreds of commercial and corporate barter companies serving every part of the world. You are limited here only by your imagination.

Reassess your sources of credit. Your bank is no longer the picture of financial health it might have been when you first applied for a line of credit. Reevaluate your credit line and the terms. Then, look for secondary lines of credit if business continuity is an issue. If your business group does not have a banker or two, do some strategic networking to get acquainted with commercial bankers who may be more stable. Talk with them about what line you may need.

Reevaluate your compensation plan. Make sure you are incentivizing the right thing. For example, are your sales people paid more for what they sell, or for bringing in new customers? You will need new customers in order to grow your business. Do you pay staff bonuses for cost cutting and innovation, or just for the profit the company makes? Your compensation plan should strategically drive your people in the direction of growing the organization.

Do not think that cutting your price will stimulate sales. A McKinsey research study finds that in a typical midsize company, a price cut of 5% would have to generate increased sales volume of 19% in order to remain cash flow neutral. That kind of sales increase almost never happens from a price cut alone. Unless there is a compelling reason to lower prices, it is better to hold your price line and possibly experience lowered sales for a while, then to try and recoup your cash flow after the economy perks up. It’s always harder to raise prices then to lower them.