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Do you remember Harry Markopolos? As a financial analyst for a Boston investment firm, Markopolos was asked to reverse engineer Bernie Madoff’s trading strategy and revenue streams. The unregistered hedge fund was producing stratospheric returns and the investment firm wanted to duplicate Madoff’s success. According to an interview with 60 Minutes, Markopolos said it took him five minutes to figure out it was fraud by looking at the performance line. Markets go up and down, and Madoff’s only went up. Of course, he turned out to be right and Bernie Madoff was found guilty on all 11 felony charges. The rest is history.
Those who have been around for a while, or who have simply studied historical financial patterns, know that market volatility affects all businesses, causing almost inevitable contractions in the business cycle. A significant drop in the stock market, for example, can result in consumers restricting their spending to only bare necessities, as they watch their 401(k), IRA, and pension investments decline in value. It may also generate uncertainty, which can impact both interest rates and the availability of loans. Mix in unpredictable events such as natural disasters, accidents, increased unemployment, and governmental policy changes, and you have an environment ripe for unsteady cash flow. If not prepared, the risk of landing in a difficult position becomes real.
With careful planning, you can successfully manage keeping your business stable through cyclical ups and downs. A good place to start is to analyze and identify ways to save money that don’t jeopardize day-to-day operations. Maybe there are fixed costs you can convert to variable, such as hiring temporary workers during busier times or moving to a higher-trafficked location with a less expensive lease. These changes are worth pursuing in the interest of surviving uncertain times and possibly even growing the company long term.
Asking vendors for better terms is another option worth exploring. Because vendors have a vested interest in the success of their customers, they might be willing to exercise flexibility.
To help prepare for uncertain times, it is wise to create a budget that reflects monthly ebbs and flows and develop a plan to ensure you are prepared for times when you’ll need to do more than just cost-cutting. Additional moves to help prepare your business for inevitable fluctuations include securing both a good Business Credit Card and Line of Credit.
A business credit card can help with short-term cash flow needs and might even earn you cash or other rewards that can offset the costs of travel, office supplies, and other business-related purchases.
A line of credit should be a part of your long-range business strategy. Borrowing when cash flow is required and paying it back when business is good can keep your company on an even keel. It is important to note that the best time to apply for a line of credit is before you need it. When the economy slows down, risk goes up and access to credit can become more difficult for some. Being able to cover payroll, make purchases, and manage operating costs until outstanding accounts receivable are collected can mean the difference between growing a business and shuttering it. Securing and responsibly using credit lines can also help establish and maintain solid credit. Maintaining a good credit rating is central to accessing larger sources of financing, so it is a good idea to begin to incorporate these financial tools as soon as possible.
I hope this information provides some ideas to consider when preparing your business balance sheet for good times and bad, and encourages you to keep market awareness a top priority.
Rene Almazan is a senior vice president for Vantage West Credit Union, a $1.9-billion financial institution which serves a growing membership of nearly 150,000 via branches across Arizona and online channels, as well. Vantage West offers consumer and business banking services, and is federally insured by NCUA. Loans subject to approval. Certain restrictions and fees may apply. VantageWest.org