Financial Management

“45% percent of the 27 million small businesses in the US say they are currently not profitable,” according to a recent Newsweek article summarizing a survey by George S. May International Co. These are businesses that employ 100 or fewer people, and make up half the nation’s private, non-farm payroll.

If your business is showing signs of persistent profitability problems, now is the time to make plans that change the status quo. Here are some suggestions to start your thinking.

Whenever an operation is spending more than it makes, there are only three things that can be done: increase revenue, decrease expenses, or shed assets. Approaching the last third of 2009 and perhaps the bottoming out of the recession, it is time to plan the steps to prepare your business for a stronger 2010 performance.

Sometimes it is more comfortable to live in denial and not face up to making the tough decisions needed now. And sometimes we feel we have the plan in our heads and that we can work our way through it. But a plan that is in your head is no plan, it is just a dream. Put your options down on paper and evaluate the effect of each one. Then write the actions you need to take to achieve the results you want. And track yourself as you work your plan.

Decreased expenses is responsible for profit improvement in many of the public companies in the last quarter. And maybe you can gain some traction with a miserly approach to your business operations. Reducing payroll may work if the productivity of the remaining employees can be increased as business grows back, and their morale can be sustained. But the cost of replacing people resources can be very high. Cutting head count is low on the list for a small business. On the other hand, a “fanatical” attention to the little costs that add up in a business can make a difference. One hundred dollars saved in electricity each month flows right to the bottom line. Look for savings in all the “expense habits” you and your staff have made routine. Question everything.

If a business does not continue to grow, it will eventually decline. It cannot remain static. Increasing revenue can be a big profit boost if the new revenue does not involve too heavy an investment in inventory, marketing, or personnel. It may be right to look at a new product line or marketplace, but before jumping in take the time to create a business plan that shows true potential. Regardless of how you go about it, a revenue increase plan for 2010 must be in place.

And if you shed assets use the proceeds to pay down debt, not to meet payroll. Us asset sales to offset liabilities not cover operating expenses. This approach is usually a one shot deal and can be of value if you have unused equipment, excess inventory, etc. But make sure you don’t need to repurchase the asset later when business improves.

You are a leader and your team expects you to make the decisions that are needed to maintain business prosperity. Keep this responsibility at the forefront of your mind this month and make it a priority to produce a year-end action plan. Your business should be in the 55% category…making money and moving forward. It’s your job!

Banks…you’d rather not deal with ‘em…but your business can’t live without ‘em, right? Problems with bank relationships are a common complaint I hear from owners. Nothing is more frustrating than fighting through a bureaucracy that seems to care less about your needs than about blindly following its own rules. So what can you do about it? A lot…

Someone told me years ago that banks spend money on furniture and carpets for loan officers but not on the payroll. The impression a borrower gets when entering a “fancy” office automatically gives the power to the lender. But come on…borrowing for a valid business purpose is a matter of reaching a win-win business relationship with the banker. And you are the owner of a business; the banker isn’t. The banker has probably never signed a payroll check on the front. In fact, the banker is a sales person. You’re a CEO! His pushcart is full of money and the smart sales-oriented banker wants to find a way to sell you some. But he makes you think it has to be on his terms, or else.

I remember years ago I was applying for a home mortgage and the banker said that I needed to pay him for the year’s worth of homeowners insurance up front. I was the manager of an IBM office at the time, this was a rather small regional bank, and I was in its local branch. I had never escrowed insurance for the homes I insured before and told the banker that I would not do it now, and that his demand was a show-stopper. During the conversation I asked him how his rule would apply if my father paid the insurance company directly himself as a gift to me. He couldn’t respond to that one. And I asked him if he were paying my premiums how I would know he had paid them. Again not a very cogent response. Then I asked him if he would be satisfied with proof of insurance coverage from my insurance company. After a phone call about the whole matter…he backed down, and I paid the insurance company myself.

The moral of this story--the person who makes the rules can change them. The problem with most banks is that you cannot get to the one who makes the rules unless (and here’s the key) you are dealing with a community bank.

There are three broad classifications of banks: 1) Money center banks, which are large banks in a major financial center that borrow from and lend to corporations and other banks rather than consumers. 2) Regional banks that operate in a region of the country, probably lending to both corporations and consumers, and 3) Community banks that focus attention on the needs of local families and businesses rather than placing a priority on serving large corporations.

I like community banks for small business banking needs. These banks are also small businesses, led by executives you can talk with and probably meet at a service club or country club. They channel most of their loans to the areas in which their depositors live and work helping to keep a community vibrant and growing. Community bank CEOs are accessible to you and they are deeply involved in local community affairs. You will find that many community banks consider character and business experience when making a loan decision. Megabanks, on the other hand, apply impersonal qualification criteria to all loan decisions without regard to individual situations.

Community banks are nimble decision-makers on business loans because the decisions are made locally. Your loan is not one of dozens reviewed each week by a big-bank loan committee convened in some mahogany paneled room in another state. And community banks understand the needs of small businesses because they themselves are small businesses. But the core concern of a megabank is corporate America.

Some Internet research I did found that 40% of banks in the United States have assets under $100 million. Community banks’ boards of directors are made up of local citizens motivated to advance the interests of their area. Average rates for checking account and other depository services are, on average, 15% lower at small banks than at large. Today most community banks offer all the same electronic and ATM services offered by the big banks. So what are you doing with your business accounts in some huge, impersonal banking behemoth? Why are you dealing with loan officers so far down the decision-making chain they can do little more than key in your loan details to a computerized evaluation program? Get a relationship!

Find a local banker you like from a local bank you like and begin to develop a relationship. Get some business references; ask around. Invite a couple of community bank loan executives in to talk with you about your needs. Find out where they are in the bank’s pecking order. Find out if they can be the point person for all your banking needs. Meet the tellers. Community bank tellers want to know their customers. They’ll learn to call you by name. Make friends at your bank.

OK, so you’ve got a lot of business entanglements with a regional or money center bank. And yet you’re frustrated because you have had a different “relationship manager” every six months for the last three years. Sure, you can’t yank all your accounts out at once. But what you can do is move a small account (say a payroll account) to a community bank. Then tell your new friend, the loan exec there, that this is a first step depending on how well things work out.

And once you’ve moved the accounts to your new community bank, don’t rest on your laurels. Banking consolidation can change your community bank into a mega bank overnight. So keep another bank on the back burner with some other account, say a mortgage account for the office facility you own through a separate LLC. There’s nothing like a little ongoing competition to keep the banks on their toes. It’s a rare bank that can claim to be the only candy store in town.

If you’ve got to have a bank as your “partner” in your business, at least you can keep your contact there aware that you can easily move your banking relationship. Every bank sells a commodity (money). Let your banker know that you’re looking for added value in the relationship. That sounds a lot like what small business owners hear from a lot of their customers, too. Right?