How to Work with Your Bank in a Down Economy (Guest Commentary)

Finding effective funding sources can be difficult for businesses, especially during a slow economy such as this. Whether a company is expanding or simply needs additional cash, there are some fundamental principles that should be considered as you work with your bank. And, much of this financial discipline works as well today as it does in a healthy economy.

• Reducing Expenses. To limit unnecessary spending, evaluate your overhead structure during down cycles to ensure some minimal level of profitability. Look at all expenses and find creative ways to be more efficient across the board. Start by evaluating product lines, both the unprofitable the marginally profitable lines that are consuming cash to support. Once the loss leaders have been identified, consider eliminating them until the economy improves.

Inventory costs carried by a business is another excess that can easily accumulate over the years. Reduce those stale inventory costs to increase cash flow.

Finally, review planned capital expenditures. Anything that doesn’t directly increase profitability should be reconsidered. Avoid anything that puts unnecessary strain on your capital base.

• Maximizing Cash Flow. If you need to consider borrowing, be sure to match your debt structure with the funding need.

If your cash need is short term, a line of credit secured by working capital assets can be effective. This may allow you to address timing differences if you have a slowdown in receivable collection due to the economy, but still need to meet vendor obligations. The line of credit balance will move with related assets so as business fluctuates, the debt level remains on target.

If capital expenditures are needed for equipment or additional space, work with your banker to explore alternatives. Consider fixed rate or interest rate hedges to ensure your debt service requirements won’t fluctuate with economic conditions. Leasing may be an option because it minimizes cash impact on the company. Review current credit terms being extended to your customers and find ways to shorten the trade cycle, increasing cash velocity.

• Borrowing. First, determine how much debt your company could responsibly handle.

Start with your current cash flow. Banks will use history as an indicator of future performance so if your historical cash flow would not service the proposed level of debt, it is less likely to do so in a down economy.

Second, be realistic about projected financial performance and associated cash requirements. A profitable business that isn’t growing, yet shows consistent cash flow, will generate a certain amount of cash on a regular basis. Generally, this should be sufficient to amortize any outstanding debt over a 5 to 7 year period. If you expect a downturn, consider the effect on cash flow and the potential amortization of your total debt.

Finally, don’t count on unforeseen profits. If your company has grown at a moderate pace, don’t count on a short-term, rapid growth period to justify the level of debt you believe you need.

• Lessons learned. During poor economic conditions, review every aspect of your business, including overhead structure, product mix and pricing strategy, cash flow, working capital and company credit facilities. The objective is to improve profits, retain a valued customer base and key employee contributors.

As a best practice, you should work to establish a strong working relationship with your banker regardless of the economic climate. Banks offer many products designed to maximize your cash availability through collection, disbursement and funds movement services. And, payment systems are undergoing significant technological enhancements that are helping to further drive down banking costs for businesses. Your banker can match products and services to your business more effectively if that person is closely familiar with your company and your management team.

Economic cycles come and go. The most successful management teams effectively prepare for those periods of uncertainty. If your bank has confidence in your business plan and management skills, you will enjoy more flexible financial support during a down economy.

Jeff Dunn is the president and CEO of Bank of Arkansas NA. He may be reached at 479-973-2600.