If Lexington has a frontline in the battle to survive the recession, it would have to be the Kentucky Small Business Development Center (KSBDC) at UK's Gatton College of Business and Economics. "We've increased our Kleenex purchases," said Dr. Becky Naugle, the center's state director. "These are often family businesses. It's often very emotional and they're really stressed out by the time we meet with them. I've seen lots of tears."
Naugle and her colleagues across the state are seeing more and more worried, stressed-out small business owners darkening their doors.
"Mostly, distressed companies show up with cashflow problems," said associate state director Gordon Garrett. "Typically, we are introduced to them because they're trying to raise more money. But that's often just a symptom and we have to dig in and look at the underlying causes."
With 17 satellite offices statewide, the KSBDC, a partnership with the Small Business Administration established 29 years ago, typically sees up to 2,500 clients annually. The Center provides free one-on-one consultation services as well as the educational opportunities provided by workshops, seminars and conferences. "We used to see that a good 60 percent of our businesses were startups," Naugle explained. "We're seeing that almost reversed. More existing businesses are coming in to deal with issues or trying to make sure they're as healthy as they can be, with the economy being what it is."
Lately, the trend has been related to serious cashflow problems. "We're seeing a real tightening by the banks and on the level of risk they're willing to accept," said Naugle. "So, while some clients have had a pretty stable line of credit, they're now seeing those cut back considerably or just totally eliminated. That puts them in a position of getting payments slower from their clients and so the credit that they need for their operations and their cash flow is now being cut back on them, as well."
Garrett has talked with businesses that have seen revenues decline by as much as 70 percent in the past year. Panic takes over and sets in motion a downward spiral. "They typically make the mistake of trying to lower their prices to maintain market share, so then they see their margins decrease as well as their revenues. And at the same time they don't make changes with their cost structures, so they quickly run out of cash," he said.
The next move, more often than not, is to return to the bank to plead for more credit. "Often these lines of credit from banks are secured by collateral and the collateral has lost its value," Garrett said. "So, just like with the home mortgage business our companies are upside down because the assets they used to secure the money they borrowed have now declined in value. So when they go back to the banks to borrow more money, the bank says 'whoa, wait a minute. Let's get a true market value on those assets' and realize you're over-extended already and they're not going to lend you more money."
He advises companies that have doubts about their customers' ability to pay to try to collect an up-front materials fee or a deposit to cover their costs at a minimum, and then invoice for the profit balance. "So, at least they're not going to be suffering from a total loss if the client is not able to pay."
Many small businesses have no formal credit policy for their clients, and find it highly uncomfortable to introduce a policy after a relationship has been established. Naugle acknowledged that a business' relationship with its clients, one of trust, is sensitive and delicate, causing great reluctance to introduce any implied distrust. "Nowadays, however, most clients are comfortable that when they get credit from someone, there is a process that they go through. Making that a traditional part of your business is a good first step."
Above all else, counsel Naugle and Garrett, do not put off counseling until the 11th hour. "Come to us as soon as you feel as though you have a problem," said Garrett strongly underscoring his words. "We stand a much better chance of being able to save and help a company at that stage. We see quite a few companies that think some miracle is going to occur and then when they run out of cash and can't make payroll tomorrow, they call us. And then it's way too late."
Naugle is seeing with increasing frequency clients who have allowed themselves to slip into a state of denial. "We've seen them even stop opening statements and bills because they just can't get their arms around just how bad the situation is."
And perhaps even worse is a false sense of hope she is hearing among many. "One of the scary things going on right now, is looking for that silver bullet. With all of the talk about the Stimulus package and the recovery act, there's an assumption and, I guess almost prayer, that there are going to be grants available to bail out these companies. That's not what's in that recovery act."
The KSBDC has a track record of developing credible financial and operational plans and guiding its client's realization of those plans. For more information on transformative consulting or other KSBDC consulting services, contact Naugle or Garrett at 859-257-7668.