US Small Business: Cash Flow Strategies for 2011

To believe or not to believe, that is the question.  Of course, with regard to US Small Business, I’m talking about the economic recovery, or the purported economic recovery.  One side in Washington says things are coming around, yet seems to consistently do everything possible to punish small business.  This small business owner says cash is king, and if you don’t have a cash flow strategy, it’s high time you get one.

Economic Outlook

Kiplinger reported in March that we should expect to see 8% growth in small business this year, up from 5.6% in 2010.  Equipment investment is expected to increase by 12%, with construction equipment busting the curve but still pulling a 2% growth factor.  Gross Domestic Product, GDP, should grow by about 3% according to Kiplinger, tempered by energy concerns and unrest in the Middle East.  These are good signs of a steady economic rebound.  However, unemployment is not expected to change much, as this slow growth won’t move the needle.

Yet the March Discover Business Watch reported that the outlook for Small Business is more pessimistic, with 54% believing the economy is getting worse, with 42% of survey respondents saying their own personal business conditions are worsening, and increase from February.

These are just two examples of seemingly conflicting stories on the US and global economy.  So who do you believe?

Uncertainties Remain

Here are two things you can pretty much take to the bank, and they involve uncertainty for Small Business, and uncertainty is worse than bad news, because it is difficult to formulate and act on a plan.

1) Health Care – No one knows how the current Obama-care will affect small business overall, but the low-down ain’t good.  However, this issue is still hotly contested in Washington, with GOP moves to repeal or de-fund the most punitive elements of the law.  What we do know is that this uncertainty is driving health care insurers used by small business to raise premiums.  Translation: the cost of hiring new employees is basically unknown in total, and many small business owners are being forced to cut their health care benefits (there is actually a provision in the law that makes this economically appealing), making them less attractive to top talent.

2) Energy – Does anyone believe that energy prices are going to drop?  When gas prices went up to $3.50/gal at the pump during the Bush administration, an assassination watch was in order.  Now it’s happened again with little ripple from the media, and perhaps the public.  Why?  Well, without making any assertions on media leanings, the public has become de-sensitized to the bad news.  It’s the same worry parents have when their kids play violent video games.  We’ve begun to accept it.  The question is, small business owners don’t know how dramatic their energy prices for plant electricity and natural gas will change, but they do know proposed environmental legislation like Cap and Trade will not bode well for their price per kilowatt.

Customer Downward Price Pressures

Many sources say businesses need to raise prices due to rising costs of raw materials and energy.  Sounds great, but in a recessionary environment, you know that customers will price shop you to death and place downward pressure on your prices even while your costs are rising.  Sorry about your luck.  You can’t simply cut your staff in half over and over again and demand they do more with less.  At some point, you need to become more effective—dramatically so!

Cost Reduction Strategies for Small Business

Here are some cost reduction strategies to preserve cash flow and reduce uncertainty in your expenses to the extent that you can.

Getting the Work Done – Outsourcing & Equipment

Many businesses are seeing increases in sales, even though they may not be sure how sustained it will be.  Still, the work needs to get out unless you want to walk away from it.  For many small businesses, this is a luxury they cannot afford.

So what do you do?  You can hire and help out US Employment, yet we know with the uncertainties in Health Care costs alone this tactic is fraught with risk for your business.  Here are two strategies for your small business:

1) Outsource Non-Core Activities – Don’t hire, outsource activities that are either temporary in nature, interim and transitional duties, or things that need to get done but the customer does not pay for, classic non-value-added duties like secretarial, maintenance, purchasing and payroll.  Please understand the difference between non-value-added and non-essential.  These tasks may be essential to your operation, but your customers won’t explicitly pay your for them.  In manufacturing, if it doesn’t change the form or function of the product, the task falls into this category.

This is actually a great cost reduction strategy, as firms exist everywhere to do things that might not be your strength as a business.  Virtual Assistants from overseas can be hired at a fraction of what you pay in the US.  As tasks go up the skill level ladder, communication barriers make the overseas usage a bit trickier, but just the fact that you are paying only when needed for services and not finding make work for that guy who doesn’t justify a full-time position, the savings using US outsourcing are significant as well.  Even higher end work like Engineering, Project Management, Sales Management and Negotiating deals can be sourced virtually, letting you focus on what you’re really good at.

2) Upgrade Equipment – This ranges from PCs to industrial production equipment.  With the downward price pressures we talked about earlier, you may be forced to get a lot more efficient, and one way to do that is with upgrades in business equipment.  More parts per hour, be they photocopies or widgets, drive down your cost of delivery, allowing you to lower your pricing while capturing a few margin points for yourself if you do it right.  Great news again—in bad economies businesses close and sell off assets to create cash, and you can find super deals on used equipment that is still an upgrade over what you may have that is obsolete.

Capital Expense Tactics

If you buy into the need to upgrade equipment, it is a good time to consider financing that equipment.  Why?  Right now, asset based financing via Equipment Leasing is offering very low buy rates compared to years past.  This is a result of the economy and still low interest rates.  Getting qualified, however, presents a larger challenge as banks are still hesitant to dole out money to anybody.  Your accountant can provide you with the tax benefits of leasing (off balance sheet, payments fully deductible, etc.), but let’s just look at cash flow.  Buying the equipment finance, equipment leasing, medical equipment finance, industrial equipment financeequipment outright means spending tens of thousands of dollars out of working capital that you might not have.  With the uncertainties we talked about earlier, I’d be looking to build cash reserves month to month yet not sacrifice getting the work done.  Equipment finance via lease remains the least expensive way to get into business equipment, meaning having it in your building or offices performing and earning revenue, increasing your competitive advantage and lowering your delivery costs.  In many cases you can start using $50,000-$100,000 worth of equipment for the first two monthly payments on a 5-year lease.

Fixed and Variable Expenses – Energy Strategy

As you take on new work, the success problem of sales is that certain variable expenses will rise accordingly.  You need to be taking every tactic possible to scale your business and turn formerly fixed expenses into variable ones.  The outsourcing strategy we talked about for non-value-added activates can be applies to direct, revenue generating tasks (like manufacturing) and achieve this.

Let’s take a look at Energy.  This is a variable cost due to usage, but for many companies, it is a variable squared.  How?  Because they are on a variable rate with the power company, absorbing all the risk of rising energy prices.  So not only are they paying for what they use, in today’s climate they are paying more for what they use.

If you’re not on a fixed rate based upon your billing history, call your electric company as soon as you finish reading this and get prices.  Even better, if you are in a deregulated state in the US and you haven’t shopped your energy supply through a licensed energy broker, what are you waiting for,  Chapter 11?  energy choice, energy solutions, iPower6, energy contract savingsEnergy companies all want to bid your power if you have any significant usage at all.  If you bills run 5 figures every month, that is significant, and the difference between a few cents per kWH paid on your bill can result in tens of thousands of found money for your cash position.  Find out how much you can save in an Energy Choice program now.

Improving Your 2011 Small Business Outlook

Look, the jury is still out on the economy.  I don’t want it to crash your business while worrying about it.  You still want to move ahead, and, if you’re reading this blog, grow your business even in uncertain times. 

Think very carefully about hiring full-timers in the current environment due to the unknown expenses of health care that is attached to every new employee.  Consider a creative outsourcing strategy instead.  Then look to your business equipment to determine if upgrading or improving it will provide you with a controllable reduction in your cost of delivery and finance it to preserve your cash balances.  Then work to take care of variable expenses like energy by getting every last penny you can from the current marketplace.  You’ll sleep better at night and be able to move ahead profitably.

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