Kathie Sowa, Commercial Products Executive for small business, Sacramento, Calif.
One of the most common – and sometimes fatal – mistakes business owners make is not cutting expenses quickly enough when sales revenues and profits decline. Sure, owners will slash a lot of discretionary spending right off the bat, but the biggest expense usually is personnel. Business owners are understandably reluctant to lay off employees, especially those who have been on the job for a long time – perhaps since the beginning. In those cases, your employees are a lot like your family, and eliminating their positions can be very hard to stomach.
Still, business owners who don’t bring expenses in line with lower revenues and smaller profits will quickly find themselves with negative cash flow. One way to cover that is through liquidity – personal or business. Another possibility is to draw upon a business line of credit, home equity line of credit or credit cards to compensate for negative cash flow in the short term. But neither of these options is going to help over the long term. Instead, they will just help eat away at the net worth of a business – and possibly business owners, depending on how much a personal stake they have in the company. It’s better to just accept an economic downturn’s impact on cash flow and hammer out a strategy to immediately cut costs, even if it means painful sacrifices.
Another fatal mistake I often see happens when successful business owners decide to tackle another business venture entirely outside their areas of expertise. We recently worked with a trucking company that was very profitable. The owner wanted to try his hand in a new business that produced and marketed fruit drinks. On one hand, the distribution capability and expertise – thanks to the trucking company – were huge positives for the new business. But the owner had no experience in either the food industry or manufacturing. As you might guess, the new venture never performed well and eventually failed. That, in turn, put a major strain on the overall cash flow of the combined businesses. In the end, both the cash flow and the net worth eroded to the point where the owner no longer could qualify for conventional bank financing.
Finally, some business owners also make the common mistake of taking on way too much personal debt during good times. When the cash is flowing well, owners may be tempted to buy expensive homes, boats or even airplanes. One business we worked with recently had regularly posted positive cash flow, but it was reduced significantly during the recession, almost to a break even position. This drove the overall cash flow – personal and business – to a large negative position. The reason for the slide: the huge personal debt of the owner, who had bought an expensive home and an airplane in the last few years. Even worse, since luxury items aren’t in high demand during a recession, those assets now have less value, which means selling them to help pay off loans isn’t a viable option.
Kathie Sowa is a Commercial Products Executive in Global Commercial Banking for Bank of America Merrill Lynch. She leads national teams providing credit and treasury solutions for small business owners, including 504 and Small Business Administration loans. Sowa began her banking career in 1985, joined Bank of America in 1997 and is now based in Sacramento, Calif. She has a broad banking background in Commercial Real Estate, Commercial Banking, Risk Management and Special Assets.
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