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Tips to Help in the Growing Credit Crunch Environment

by Deni Gonzales, Bakersfield Business Consultant

    As a former Business Development officer in the banking industry for 12 years, I was frequently asked the question, “ How can I get the money I need for my business ?”   I would then start the arduous task of collecting vital documents such as tax returns, profit and loss statements  and accounts receivable aging, just to mention a few.  

. Too few owners had the necessary information on hand and valuable time would be wasted collecting data from the CPA , office secretary ,their reluctant spouse or the overwhelmed business owner to do a simple Debt Coverage ratio analysis - that silly thing banks due to see if a loan request will cash flow.

    To my shock and dismay, an all too familiar pattern emerged.  I discovered  how truly unprepared many of my clients where when it came to the financial and future planning of their life’s work and family support.  I referred many clients, to the Small Business Development  Center  (SBDC) either at the Weill Center or their website at sbc.gov/ financing  (which our state tax dollars provide for them).       SBDC helps the client prepare a business plan that requires the owner to carefully analyze all aspects of a start up business and develop a clear understanding of their industry.

    Several clients actually followed through with the detailed planning, most simply  didn’t or couldn’t take the time because they were too busy at the task of being busy.

    Unfortunately, being very busy doesn’t always guarantee profitable results but it does create a false sense of security.  Sadly I have seen too many small business owners sacrifice time with family/friends , exhaust savings and retirement plans, and never achieve their desired level of success in their business.

   It takes calculated planning, evaluation, research, market strategies ,and knowledge in their selected fields to not only start a business but sustain  its success. Granted there are some lucky owners who hit the right product or service at the right time and have good instincts to succeed.  However, most business owners are not so fortunate

   In my experience, the top five reasons a business fails are:

1.        Miss financing - Long  term debt is financed with short  term money , credit cards, business credit and home equity lines without a clear repayment plan. Companies heavily indebted find it next to impossible to get a fixed loan for restructuring this type of debt. Lenders can also close and term out a business line if the debt isn’t cleared yearly.

2.        Break Even Analysis - How much product or service needs to be sold to cover the monthly debt .Determining the Gross Profit margin needed to make the business  profitable and setting the appropriate markup. Without this calculation businesses underbid a project and wonder why they didn’t make any profit.

3.        Cash reserves- A minimum of 3-6 months of working capital should be held in reserve to cover short term accounts receivable issues and inventory restock, owners draw should be realistically set each month without depleting the company’s cash flow. Failure to do this causes the b/o to frantically collect receivables and rush to the bank to keep checks from bouncing. It can also delay future projects w/o the cash to pay for materials and operating costs needed to keep the bus going.

4.        Marketing- failing to discover their niche, understanding competition  and how to effectively advertise to reach their target market. This causes a flood of duplicated product and service increasing competition. The key here is to find what need your competition isn’t meeting and fill the gap. It can also create alliances instead of enemies.

5.        Planning- The preparation of the business plan is not the end result of the planning process. It is a tool to research development, clarify, and measure progress. Poor or no initial planning leaves the business owner struggling for answers as to what to do next.