Managing a Business in Times of Recession, part 3

[inHisbalance]

Previously I mentioned that small businesses often could manage recessionary times better than big businesses.

However, one problem area they might have in common is being over leveraged. Basically, over leveraged is

operating your business through borrowing. Now, this is how many businesses operate, and it is not a bad thing

unless your debt ratio is too high.

 

The "debt-to equity" ratio is simply the total liabilities divided by the total equity. Most lenders look to this ratio in the

range of about 3 to 1 as optimal. If your ratio is significantly higher, you should make correcting this one of the

highest goals for your company.

 

With interest rates low for a long time, it is easy to ride the wave and not be as concerned as your line-of-credit

balance increases. This is probably the main reason for debt-to-equity ratios getting out of line. However, I believe

that interest rates are soon to rise significantly. Therefore, it is now doubly important to get your debt-to-equity

ratio in line.

 

This, obviously is not an easy thing to do, but there are steps owners can take to achieve this.

First, as always, is cost cutting. We always try constantly to do this, but one can always be more aggressive (see my first post on managing the Income Statement.)

Re-structuring the balance sheet and shifting debt are other options.

Sell unused assets.

Lower your inventory if your turns are too high.

Factor your receivables (an option I don't prefer but, if necessary,can be done..........but only with a reputable company at a reasonable rate.)

Talk to your lender about restructuring a portion of your adjustable line of credit to a fixed term loan while rates are still low. If necessary, approach a secondary lender about this.

 

These are just continuing thoughts on managing small businesses through stressful times.

 

I can give you the tools and financial experience to help your company thrive.

 

 

Thanks,

 

Jim

 

 

"The Paulding Financial Graybeard"