How to Recession Proof Your Small Business

by Alan L. Olsen, CPA, MBA (tax)
Managing Partner
Greenstein Rogoff Olsen & Co. LLP

The recent collapse of Bear Stearns & Co., one of the largest financial institutions in the world, has intensified the fears of most small business owners in the Bay Area despite an earlier, rosier prediction by the Association of Bay Area Governments that the recession would have minimal effect on the region.

The number of 2008 permits for new housing in Alameda County dropped 33% compared to the prior year. Although the Bay Area unemployment rate of 4.9% is below the national rate, it is almost a percentage point higher than last year. Unemployment rates are predicted to increase up to 5.5%. Employers are more wary about hiring as indicated by the prediction that the number of new hires in 2008 would only increase by 15,000.

“Conservatism” is the buzzword, second to “Recession”. Firms are holding onto cash until the subprime crisis abates and the credit markets stabilize. Small businesses are more affected by the volatility. We suggest seven ways to evaluate your business systems:

1. Automate Accounts Receivable and Accounts Payable
   Ensure that you are using accounting software that prepares the accounts receivable aging schedule automatically. It will identify customers who have 30 days or more of unpaid dues allowing you to forecast major cash flow problems. The accounts payable module serves as a reminder when to pay bills and to generate and record payments into the checking register. Automation’s overall cost in the long term is compensated by a more efficient credit policy and protection of a business’ credit score.
   
2. Make Paying Easier for Client and Yourself
   The absence or lack of a well-developed collection protocol is the primary cause of poor cash flow. Diversify the ways by which you could collect your bills. Consider credit card payments, electronic payments through PayPal or Google Pay, enclose postage-paid return envelopes with your bills, or offer discounts for prompt payments. Likewise, time business payments carefully according to your cash inflow. By organizing and entering unpaid bills timely and correctly, late payments and finance charges can be avoided. Make it a point to pay these bills consistently.
   
3. Cut unnecessary expenses cautiously
   Think about long term negative consequences for your business when cutting expenses. Ensure that the service quality to the top 20% of your business customers is not degraded because of the cuts. Examine fixed and variable expenses. Is a conservation program ripe for implementation to control your burgeoning utility bills? Does your computer system need an immediate upgrade or can it be utilized longer?
   
4. Evaluate your payroll schedule
   Consider changing your payroll from weekly to biweekly or monthly. Reducing the amount of payrolls, in turn, reduces payroll tax deposits. Consider payroll advances to help sway employee resistance.
   
5. Bill immediately and thoroughly
   Customers do not pay for what they have not yet been billed and confusing bills create opportunities for delayed payments. Discuss the billing procedures with your customers and be specific about the payment terms. If payment within the agreed upon date would pose a problem, let the clients know that they need to inform you ahead of time. Besides, when you do work without being paid up front you are extending credit to your customers. Do you really want to loan your customers money?
   
6. Put your cash to work
   Make daily deposits. And make them before the bank stops its daily transactions (2:00 PM - 3:00 PM). Additionally, transfer idle cash into interest-bearing accounts. Even at 2% or 3%, this money adds up.
   
7. Plan ahead and assess your risks
   Planning ahead is the most crucial aspect of recession proofing your business. Prepare a cash flow budget based on last year’s history, create a game plan implementing the suggestions above, and stick to it.