The 3-Pronged Attack on Your Business

Author: Larry Chester, President

We live in unprecedented times. Our entire society has been under attack from a virus and how it’s affected our lives, the economy, and the world that we live in. Governments have put together programs to save the economy, save businesses and save jobs. Business owners have shifted their businesses to survive, and the entire landscape of how we do business has changed. We work from home, we shop online, we meet on Zoom, our children go to school remotely on a computer monitor. We’re in the era of a new economic reality.

But even as we make changes in the way we live, work and relax, the future is ready to play out the next chapter in this saga. It’s not a matter of preaching doom and gloom, it’s bringing the reality to bear, and presenting a scenario that will force new changes to the way we do things, if we’re not prepared. Since March 2020, the government has taken steps to put money into the pockets of consumers and businesses. This has quite literally staved off a great depression that would have put millions on the street and closed tens of thousands of businesses. But that government largesse is ending. The people of this country, and its businesses are going to have to stand on their own two feet. Look at the three ways our lives will be affected in this next chapter.

How the New Economic Reality is Changing America

Individuals and Families

Since the pandemic began, there have been significant benefits to families:

• There have been three rounds of stimulus checks issued directly to individuals and families. Another round is not expected.
  • First round – $1,200 per adult, $500 per child
  • Second round $600 per adult, $600 per child
  • Third round $1,400 per adult, $1,400 per child
• Unemployment benefits have been extended through September 4^th, providing up to 79 weeks of extended unemployment benefits.
• Families have received childcare allowances of an additional $300 per month for those under 6 years old, and $250 per month for those up to 18 years old for the current tax year.
• A new eviction moratorium was just extended for 60 days

These payments and credits have allowed spending that would not have otherwise been possible. It has kept the economy moving with the purchase of food, household goods, clothing, gasoline. It has spurred home construction, home sales and remodeling on a large scale. But once this money is no longer available, everyone will have to be much more careful about spending. The focus will be on basic needs, survival expenses like food, housing, medicine. Discretionary spending, which has been strong, will be severely limited.

Businesses

In spite of the fact that so many businesses have been shuttered because of the pandemic, hundreds of thousands have survived as a result of the government’s payments.

• Two rounds of PPP (Paycheck Protection Program) loans deposited from tens of thousands to millions of dollars into the bank accounts of businesses, much of which will be forgiven. This was used for payroll, benefits, rent, utilities and other critical expenses.
• The government initially provided $10,000 Economic Injury Disaster Loan Program (EIDL) grants, followed by EIDL loans at 3.75% to businesses with 30 years to pay it back.
• The Employee Retention Credit (ERC) has given companies payroll tax credits that ranged from thousands of dollars to millions, allowing them to use that money to keep their businesses whole.

At this point, there is no expectation that additional funds will be available. Business owners will have to address variances in their normal business markets on their own. All that money has been given out, there is no more available, and it’s unlikely that congress will give out more.

Banking

Banks have been very generous with their borrowers and lenient on their terms.  Many have followed the informal policy of “pretend and extend.” They have been flexible with their borrowers, waiving covenants, providing additional money through generous terms on borrowing base calculations, renewing loans with the “expectation” that business will return to normal.

But the regulators, who have been allowing them to be overly generous for the sake of the economy, cannot continue to provide the additional economic room for those liberal policies. Banks are businesses as well, and the government needs banks to return to the tighter, more realistic, credit policies. They are the foundation of the economy, and strong banking provides a solid base for businesses to operate and grow.

The Impact of Our New Economic Reality

As these three situations come to reality over the next 3 – 6 months:

• Consumer spending will drop significantly as cash availability is reduced, and spending focuses on needs, not wants.
• Businesses, which have not only been the recipient of government grant programs, but the beneficiary of consumer spending will face a reduction in sales. That drop will affect employment as business owners seek to reduce expenses.
• Banks will tighten credit by reducing advance rates, and being more restrictive in lending. As they tighten credit, and sales fall, businesses will have a more difficult time making ends meet, and bankruptcy filings will increase.

How You Can Prepare for the New Economic Reality

The next 18 months are going to be difficult as the economy finds a new stable base to operate from. But planning will allow the smart business owner to not only survive, but take advantage of opportunities:

• Reduce spending – Purchase only those things that you need to operate your business and serve your customers. Needs, not wants.
• Renegotiate long term loans and leases – You’ve survived the pandemic. Use that strength as a lever to reduce your interest rates, broaden covenants, extend the terms to reduce your monthly cash drain, making your bottom line stronger.
• Conserve cash – As your relationship with your bank becomes more down to earth, holding rather than using cash will keep your company strong, and give your lender confidence. Let them worry about someone else.
• Re-establish and continually re-evaluate credit policies – Just as the bank is going to tighten up your credit, you need to tighten up the credit of the people that buy from you. You don’t know what financial issues they are facing. Don’t become a victim of their failure to survive.
• Reduce or eliminate customer concentration – This may be a difficult time to do that but reducing your dependence on a single or several customers will reduce your risk if the whale you depend on gets sick.
• Reduce inventory – This can be a double-edged sword. You want to make sure that you have inventory, in case your source of supply fails. But having too much inventory will drain your cash at a time when you might need it the most. Protect yourself against the urge to buy too much at a greatly reduced price.
• Pay down debt – This will provide you with additional borrowing ability when you need it, in addition to strengthening your balance sheet.
• Cross train your staff – Make sure that your key people can do more things, especially in your back office. If you need to reduce staff to save money, don’t be constrained because “they’re the only one that knows how.”
• Prepare to expand – As your competition fails, look for opportunities. Buying your competition, acquiring their customer base, or complementary products that strengthen your offering will make you a stronger, more stable company, and will add sales to your top line.

Change is inevitable in our new economic reality. Whether it’s a growing economy with stifling competition that sharpens your creativity, or a pandemic and recession that force you to make changes to keep your employees whole and your business alive. The common denominator is your ability to evaluate the challenge, make changes, adapt, and find new paths through the jungle. The principles that operate a business are still the same. Control your cash, think strategically, care for your employees, and understand your numbers. Follow these principles, fight the good fight, and we’ll all be here to talk about it next year.