Keeping the Wolves at Bay: When it's Hard to Pay the Bills - BodyShop Business

Keeping the Wolves at Bay: When it’s Hard to Pay the Bills

When you can’t pay those who you owe and you’re out of your wits, there are a number of ways to prevent them from huffing, puffing and blowing your credit and finances to bits.

Many small-business owners find themselves in financial trouble during their business’ life cycle. In fact, many of today’s corporate giants were once small businesses on the brink of closing their doors.

Body shop owners certainly aren’t exempt from this problem. You may be one of those owners who always seems to have too much month left at the end of the money. And as this situation intensifies, it may feel very much like wolves are waiting for you to make a false move as you leave the shelter of your shop each night to go home.

Lose the Red Hood
What can you do to fend them off? How can you get your business back on track and send the wolves back to the wild world of business from which they came? Unfortunately, there are no easy solutions — no quick fixes — but it can be done. Let’s look at 10 steps you can take to get back on track:

1. Admit you have a problem. Many small-business owners refuse to face facts when the wolves start pawing at the door, so the first step to getting the wolves to back off is to acknowledge that they’re there. All small businesses face problems from time to time, but a shop owner is often so wrapped up in the daily procedures of running the shop that he doesn’t realize when the line between normal hurdles and a crisis is crossed.

Many signs can indicate a crisis. If you’re currently struggling in any of the following areas, then you may soon hear the wolves baying if you don’t do something:

• Sustained downward trend in monthly sales revenue.
• Noticeable drop in repeat customers.
• Sustained losses.
• Inability to meet payroll.
• Inability to meet property, sales, FICA and other due tax payments.
• Being consistently late with loan payments.
• Inability to pay any trade creditors on time.
• Often being out of inventory items.
• Being put on C.O.D. terms from suppliers.
• Excessive bounced checks out of your operating account.
• Excessive employee turnover.

2. Seek input from professionals. Once you’ve identified that you’re in potentially dire financial circumstances, the next step is to seek outside input. The first call you should make should be to your accountant or CPA. Your accountant should be in the best position to understand the financial status of your shop and to provide you with objective advice on how to overcome the crisis.

If you don’t have this kind of relationship with your existing accountant, find a new one. Talk to friends and business contacts for references. Your CPA will be a vital resource in working through your problems, and you need one who’s qualified and willing to roll up his sleeves with you.

Another source of input can come from your business contacts. You should know other small-business owners in the community who would be willing to provide advice on dealing with the financial problems you face. Shop owners you’ve met at trade shows or at other industry events might also prove invaluable in providing input. While it wouldn’t be advisable to let an in-town competitor know you’re struggling, an out-of-town owner might have faced similar problems in the past and be able to offer a proven solution. For instance, if your primary problem is steadily declining revenues, another shop owner might offer a cost-effective advertising idea that helped boost the sales of his business.

If you’re receiving frequent calls from creditors or find that you’re falling behind in keeping your taxes current, contact your attorney to ensure that you understand where you stand legally. While bankruptcy certainly is to be avoided, there are some cases in which a small-business owner is left with few other options.

3. Inform your creditors. While it may seem financially suicidal to let your creditors know you’re having problems, it’s actually advisable to do so. I can speak about this issue directly, having been involved in small-business lending for 15 years. Your creditors will find out eventually that you’re having financial difficulties, and if you’re the one who tells them, they might just help you fend off the wolves.

After you’ve met with your CPA and talked with your attorney (if necessary), meet with your banker. If you’ve borrowed money, the bank probably has a lien position on your business assets. Keeping your loan officer in the loop can have a direct impact on your staying in business. On the other hand, if the bank becomes adversarial, it can literally shut you down.

There’s another good reason to inform your banker of your problems and your plans to work them out: Banks will often extend loan-repayment terms for borrowers facing financial crisis. For instance, on a $200,000 loan at 9 percent with two years remaining, the monthly payment would be $9,140. By simply extending that same loan to a three-year payback, the monthly obligation drops to $6,360. This translates to a monthly savings of $2,780 and an annual cash-flow enhancement of $33,360.

Banks also will sometimes allow interest-only payments for six months or a year during financial crises, and the cash-flow enhancement in this case is even more advantageous. The monthly interest payment on a $200,000 loan at 9 percent, for example, would be $1,500 — only $18,000 per year. Modifying the two-year loan used in the example above to an interest-only repayment schedule would save $7,640 per month and $91,680 during a full year.

4. Take full advantage of trade terms. After you’ve talked with your banker (if you have one), you’ll need to contact trade suppliers. But be careful what you tell them. If you alarm your trade suppliers too much, they’re likely to put you on a C.O.D. basis. And if you’ve been used to ordering inventory on 30-day terms, getting put on C.O.D. could cause severe inventory shortages.

A few recommended steps to take when dealing with trade suppliers during a financial crisis are:

• Don’t pay any bills early.
• Consider changing to a supplier with better trade terms, even if the cost is a little higher.
• Shop for lower-cost suppliers for all items you purchase (inventory, cash-register tape, office supplies, etc.).
• Try to extend terms with your existing suppliers for a temporary period. If a supplier normally provides 30-day terms, ask for 45 or 60.
• Pay close attention to your payables. Don’t let them get so far behind that the supplier cuts you off.
• Keep your suppliers informed. If you can’t meet a due date, call and negotiate a new one that you know you can meet. And don’t mislead your suppliers — this won’t work a second time.

5. Keep your taxes current. While you can negotiate with your trade creditors, investors and your banker, the IRS and other municipalities offer little flexibility. Keep payroll taxes current at all costs. Not only can the IRS shut you down as a result of delinquent FICA taxes, they also can pursue criminal charges in certain circumstances.

You also need to keep state sales taxes and any local taxes (property taxes, etc.) current. If a reporting period is approaching and you don’t have the funds available, contact your attorney to discuss your options.

6. Obtain outside capital. Seeking outside capital infusion while the wolves are approaching generally isn’t the optimal time, but it’s not out of the question. First, if you have additional personal resources that can be committed, tap into them. But don’t throw good money after bad; if your problems appear to be long term with no hope in sight, save your funds.

Depending on the circumstances that caused your shop’s financial woes, you also might be successful in going to outside investors, or even to the bank, for help. If your problems have been brought on by a one-time event (a prolonged illness for you, a large accounts-receivable charge-off, a poor location) that’s since been corrected, you might find investors willing to provide capital. Outside investors might include family members and friends, local business people, venture-capital companies or other body shop owners.

If you choose to seek outside capital or a bank loan, be prepared. You’ll need to not only explain the cause of your problems, but more importantly, to provide a reasonable plan to get back on track. Prepare financial projections to reflect your planned comeback and share them with prospective investors or lenders.

7. Collect accounts receivable faster. The typical body shop has a significant portion of its balance sheets tied up in receivables, and slow accounts-receivable collection can cause a major drain on cash flow. For instance, a shop with $1.2 million in annual sales generates about $100,000 per month in gross revenue. If customers and insurance companies are paying 30 days from the date of invoice, then the shop has accounts receivable of about $100,000 (30/360 x $1.2 million) at any given time. However, if customers and insurance companies generally are 10 days behind in payments to the body shop, its accounts receivable would be approximately $133,333 (40/360 x $1.2 million). This represents a direct drain on cash flow of $33,333!

“All invoices should be sent on a timely basis,” says Brad Moser, a CPA with Gilliam, Coble & Moser, LLP in Burlington, N.C. “Many small-business owners lose cash flow by delaying the sending of invoices. And, of course, it’s vitally important to follow up with a good receivables collection program.”

If you’ve allowed some of your customers to pay slowly, you’ll have to re-educate them to repay faster. One way to encourage prompt payment is to assess a late-payment fee. Or, if you prefer positive reinforcement, offer a discount for early payment. The cash-flow enhancement will more than offset the profit-margin sacrifice of offering early-payment discounts.

8. Decrease personnel costs. In any service business, personnel costs are a high percentage. If you lose track of areas like staffing, overtime and the cost of benefits, you can quickly find yourself in financial difficulty. Cutting personnel costs is never easy, but they might just be the key reason your shop is struggling. To determine this, first check your coverage. If a lot of your employees are idle for much of the day, you have too many people on hand. If this is the case, you’ll need to cut your employee base accordingly.

Second, check your overtime payment during the past year. If a lot is being paid, then your scheduling is off and you’ll need to adjust the hours of some of your employees, with a focus on having more people there during peak times and fewer present during slow times. (You don’t have to pay overtime in most states until the employee exceeds 40 hours.) You’ll need to create unbalanced schedules to make this work (i.e. an employee might work 12 hours one day and four the next), but it might be the difference in keeping your doors open.

Third, consider lowering your salary as owner. If you can afford to do this for a time, it might free up the dollars needed to keep the wolves at bay.

9. Control other operating expenses better. Areas such as insurance and telephone service can deplete cash flow without the owner even realizing it. To help, consider shopping for better deals on insurance and long-distance telephone service. The long-distance telephone-service wars have produced some great deals, and there are several different ways to save on insurance costs. Even if you don’t own your own building, you still have to purchase insurance for your inventory and other contents, as well as for workman’s compensation and life, health and disability insurance. And whether or not you provide these benefits for your employees, you must maintain them on yourself.

10. Negotiate with your landlord. Try going to your landlord and negotiating your rent down — you may be surprised at how willing to listen he is. If you’re located in an area that’s witnessed increased vacancy, you’ve got leverage. Why? Because your space is full, and your landlord is getting something out of you — a rent check — that he isn’t getting out of other property. He may be willing to negotiate down your rent rate just to keep you.

Granted, if you’re in an area that’s 100 percent leased, this ploy will probably fail, but it’s worth a try. In either case, if your landlord is unwilling to budge on your rent, consider a move. If your lease is coming up for renewal and your landlord isn’t willing to deal, weigh your options in terms of other potential locations for your shop — you might find a better spot for less money.

Don’t Get Eaten Alive!
Even if the wolves have grown in number in recent months, there may still be hope for your business. If you try the tactics I’ve outlined, you might just be able to turn your shop around and send that wolf pack packing as you head down the road to recovery.

J. Tol Broome Jr. is a contributing editor to BodyShop Business.

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