Business Credit

This morning I listened with great interest to a local show on WCPN discussing, what else, the current financial meltdown. Several listeners called in saying that banks had terminated their home equity lines of credit; others called in saying that even with FICO scores of 720 and 750 they were unable to get new loans approved.

The tight credit is both a challenge and opportunity for the small business owner. In my experience consulting with small troubled companies, most of their problems can be traced back to wreckless use of credit which has, up until recently, been so easy to obtain. OK – maybe large debt is really the symptom and not the problem – the inability to control costs is one of the real problems.

So now that credit is tight, business owners are being confronted with not only being forced to repay loans, but to improve profitability and cash flow. This is good. If the business is to survive, the owner will have to start paying attention to the business and exercise best business practices.

One of the first places to look is cost of goods sold. Many business owners do not really know their total labor and material costs, and therefore cannot control them. In one recent case, I noticed that cost of goods was about 65% of sales, leaving very little left to cover fixed costs and profit. A bit of quick research revealed that the industry average was 47%. By reviewing production process, loss reduction, and better purchasing, we we able to significantly reduce cost of goods. Now profitability has increased, cash flow has improved, and there is less reliance on borrowed money.

I’m afraid that businesses that do not reduce their reliance on lines of credit, credit card debt, and other credit to meet short term needs, are not going to fare well in this troubled time. The key to survival is better management of the resources that are available.

WIll Limkemann
Limkemann Buiness Advisors
440-871-0976
www.neobizadvisor.com