How much money do you have in the bank? I’m talking about your business primarily, but your personal cash reserves can become an important tool to temporarily support your business. When I decided to hang out my shingle in 1979, I had less than $1,500 in my bank accounts. I needed to purchase tools, some modest inventory, and buy a truck. Customers were already scheduling work, so time was of the essence.
A friend sold me his 1966 Ford pickup truck for $500, and I lucked into a going out of business auction for a plumbing and heating contractor that was held on a weekday and poorly attended. It was unlike other auctions I attended in later years where items like sawzalls, hammer drills and hand tools sold for nearly as much, or amazingly, more than retail!
We owned a two-car garage and lived in a township that allowed small business to be in residential areas. There was only one problem: We were in a deep recession. I was on a shoestring budget, to put it mildly, but my wife had a good paying job and had me covered under her healthcare.
I hesitate to even use the R-word, but every time we have had a recession, the national media has beat the R-word drums incessantly, as if they are worried they might be proven wrong. They’re doing that right now. As if COVID-19 and inflation, along with exceptionally high prices for gas, diesel and fossil fuel, supply-chain issues and rapidly climbing prices for goods haven’t been enough to drive small business into the dirt, along comes the national media like the Grim Reaper. OK, let’s say the national media is right, what can you do to get your business recession-proof?
No. 1: Pay close attention to your business cash flow
Got deadbeat customers? Contact them and maybe give them an incentive to pay up, like forgiving any interest you added over time. If that doesn’t work, give them a deadline (in writing) and warn them you’ll file in court if they don’t pay up. And then do it. Understand that once you give them that ultimatum, you cannot legally continue to ask them for the money. Visit your local magistrate’s office to find out just how easy it is to bring the deadbeats up on charges. Pay the additional fee to have the sheriff hand-deliver their summons, which often gets their prompt attention. However, they can no longer pay you directly, and when you win in court, the court cost and filing fee is added to what they owe. Hopefully you have been keeping accurate records and copies of all correspondence (texts, emails, private messages, etc.) because that can really help your case.
This may shock you, but financial advisors want you to have no less than a month’s cash reserves to carry your business. After my experiences with a recession in 1979, I knew that the next recession was a certainty, but could not predict when. I began building up a war chest and never stopped until selling the business in 2019. We had enough cash in bank to weather a six-month downturn in the economy. Most of it in sweep accounts, which paid the highest interest. If the phones stopped ringing, as they did after the 911 terrorist attack, our business continued as normal and not one employee was laid off. The even better news is that when you sell the business the cash reserves go with you.
Commercial accounts taking 90- to 180-days should be avoided, if possible, during a recession. Sometimes those accounts are too lucrative to throw away, which is why you need a tidy sum in cash reserves.
No. 2: Establish a line of credit
If you haven’t set up a line of credit with your preferred bank, do so while you don’t need one and profits are high.
Bear in mind you’ll be paying interest on the loan, but if you feel certain you’ll be able to pay the bank back within a month or two, then this can be a real lifesaver. We always had a line of credit, but never used it. My wife, the office manager and treasurer of the business, also learned to be frugal before we met, and was the ‘Ying’ to my ‘Yang,’ as I liked spending my money on fun things and had a large credit card balance when we got married. She reined me in and together, we saved and invested our money. The few times our business needed an infusion of cash, we were able to provide that and the business paid interest on the loan.
While we’re talking about payment priorities, let’s not forget our local wholesalers. Screw that up and you’ll be on a cash-only basis for material purchases, and don’t expect to get best pricing either.
No. 3: Rein in your business spending
We never leased our vehicles and owned them outright. The business was debt-free, which certainly helps when the economy goes south. Have debt now? Work on paying that off or down now. If it looks like a recession has the potential to make loan payments difficult, or not possible to be made on time, make an appointment with the lender(s) before a recession to work out a reduced payment schedule. Loan officers would rather work with you than chase you for late payments. Think of them as your business partner because they would rather you succeed than fail.
No. 4: Get your books in order
If you’ve been cooking the books, which is always a horrible idea, stop immediately and get your books in order. You need good bookkeeping records to run the business so it never runs you. My father was a CPA (Certified Public Accountant) and cautioned us about this issue. Some of his clients kept two sets of books: One for their tax returns; and the other showing their real income, including the cash deals they simply pocketed. No pocket shots! Well, that’s not practical and almost everyone takes an occasional pocket shot. Dad said that’s what always got his clients in the end because the IRS knows, within a range, how much business your business should be doing. Stray outside those boundaries and you’re much more likely to be audited by the IRS.
No. 5: Never miss a payroll
And never fail to send the withholding tax and SS monies to the government. Guess who gets paid last? You. Our top catch for an employee was the result of his employer missing several payrolls. I know a business owner who kept his employees withholding tax and SS money to keep his failing business afloat. He also stole the retirement funds. As Dad always told me, it takes the IRS about three years to catch on to that idiotic withholding of the withholding funds, and, right on cue, the IRS summoned him in for the audit. He received a $50,000 judgment along with a $50,000 fine. When last I checked, he owed the IRS over $500K! He lost everything.
While we’re talking about payment priorities, let’s not forget our local wholesalers. Screw that up and you’ll be on a cash-only basis for material purchases, and don’t expect to get best pricing either. If tough times prevent you from paying on time, get ahead of that by sitting down, in person, with whoever is the large in charge and be brutally frank with them. I’ve seen wholesalers bend over backwards to work with contractors because they too want you to be a success instead of you going bankrupt.
No. 6: Raise your rates!
My good friend Ellen Rohr, business advisor to the trades and a columnist for another trade publication, once wrote a column saying raise your rates by $5 an hour. Like most mechanical contractors, I believed that was horrible advice and would generate nasty complaints and cost us customers. But, against what I thought was my better judgment, I did exactly that — and then held my breath expecting an avalanche of irate customers. We received just one complaint over the next few months. A year later, I did that again. No complaints. Every year we raised our hourly rates even when the books indicated we could get by. And just like clockwork, our insurance and overhead costs rose steadily as well, suppliers had their annual May materials cost increases, and employees deserved raises, so the increased hourly rate held its own and kept us in front of the eight-ball.
No. 7: Where’s the Beef?
Remember Clara Peller in the 1984 Wendy’s commercial saying, “Where’s the Beef?” If you’re too young to remember the commercial, here’s a link: www.youtube.com/watch?v=Ug75diEyiA0. Wendy’s had more beef in their burgers than McDonalds or Burger King and wanted a commercial ad letting consumers know their burger had more beef. You could say it went viral, although that term did not yet exist. It was an every-day slogan we all used for anything we felt was substandard and even crept into political debates. Clara became an overnight celebrity and Wendy’s sales increased by 31%!
What are you doing with advertising? More importantly, what are you doing with social media? It is, after all, where most folks get their news and information, unfortunately. Put the beef in your posts with short facts regarding a product that can save your customers money. Solicit reviews from customers and promote your best practices. No one likes a contractor leaving a mess behind, so if you really do clean up after yourselves, shout that from the social media mountaintops. If someone posts a negative review on one of the axe-grinder review sites, respond immediately and politely. Most folks reading nasty reviews can recognize lies, deceit and BS without you saying the reviewer is a toad.
No. 8: Relax
You got this. Once you are prepared, you can weather any recession storm that comes along.