Smart Ways to Protect Your New Business When the Market Gets Rough

Smart Ways to Protect Your New Business When the Market Gets Rough

The equity market is going through another period of uncertainty and it is making business leaders in new companies nervous. I have been operating my business since 1999 and have experienced the ups and downs of the economy. It is tough running a small business in the early expansion phase. You need to stick to your vision, be resilient and address the challenges head on.

Here are some of my learnings and advice given to me:

1. Don’t panic
The first thing you should do as a leader is vent your fears away from your employees and then ask yourself some questions. Where are our profits coming from? Which customers and what industry segments are buying the most from us and why? How can we invest so those customers and others like them will keep buying or buy more?

If you have honest answers to these questions, you will be in a great position to think about which parts of your company must be protected and which parts you should sever in order to extend its survival.

2. Monitor your cash burn rate
It’s worth mentioning that when capital is not heading your way soon, you need to keep a much tighter control of your cash burn rate.
To do that, add up all the cash you have in your company’s bank and short-term money market accounts and divide that amount by how much cash goes out of your accounts each month.
This ratio will give you the number of months’ worth of cash remaining before you have to shut down.

And once you see that number, you will probably need to get working on ways to lower your burn rate.

3. Manage out the people who are not producing your profits
Start the process of reducing your burn rate by examining the monthly pay of your employees. If you know who is producing your profits, the other employees are candidates to be managed out of the company.

Before you do that, consider how you will have to change the way your company works once those individuals are off the payroll.

If you can make the company run more effectively without those people while lowering its burn rate significantly, then you should manage them out.

One company used the capital freeze to swap less productive sales people for ones who generated more revenues and to expand into a market where demand growth was highest. This is tough with the current labour laws, however with proper performance management rigor swapping out of less effective sales staff is achievable.

4. Tell your banker about your cash collections
If your company borrowed from a bank, you ought to update your banker about how things are changing with your company’s cash flow.

The moves you take to lower your monthly burn rate should boost the odds that you will be able to make your principal and interest payments.
And you should give your banker a best-efforts forecast of how your cash flows are likely to evolve over the next year or two in light of your estimates of cash collections from customers and payouts to your employees and suppliers.
By taking the initiative to communicate with your bankers, you can avoid any surprises that might make your banker nervous.

5. Give your customers a reason to pay their bills faster
Another thing you ought to do to improve your company’s cash flow is to ask your customers to pay their bills more quickly.

OF course, asking nicely might be unproductive. In that case, you could consider offering them a discount if they agree to pay their bills in 15 days instead of the customary 30 days.

Just make sure that the discount is not so big that it costs more than the benefit of collecting your cash more quickly.

6. Ask your suppliers if they’d accept later payment
Conversely, you ought to explore whether your suppliers might be willing to extend the time you have to pay your bills.

This could be a harder sell — but if you have some suppliers that are particularly dependent on your company for their business, you may be able to convince them to extend your payment terms from say 30 to 40 days.

7. Engage your employees
Explain the situation to the employees. Tell them that you value their contribution and you need them more than ever. Then ask them if they would be willing to help the company survive by offsetting income with small equity in the company. This is not for everyone but most likely will appeal to your higher paid team members who are the one in most instance you want to keep to grow your business.