John C. Woosley, CPA and US Small Business Administration New Mexico District Director
Small businesses throughout New Mexico are feeling the effects of various government initiatives designed to stimulate borrowing and lending in the nation’s weakened economy.
The American Recovery and Reinvestment Act authorized $730 million to cover the costs of temporarily eliminating loan fees and raising guarantee limits on some loans; to fund Small Business Administration-backed micro-lenders; and to create a new loan program to help struggling businesses pay existing loans. In addition, the Treasury Department earmarked $15 billion in Troubled Assets Relief Program funds to help unfreeze the small-business lending market, which will benefit community banks, credit unions and other small lenders. Treasury will purchase existing and new SBA-backed loans made by banks, freeing up more capital so banks can restart SBA-backed lending to local small business.
Here’s some of what the federal legislation provides:
Sandra Taylor Sawyer, Director, SBDC at Clovis Community College
Business failure isn’t always the fault of bad planning or mismanagement of money or resources. When markets freeze and retreat as they have around the world, many businesses fail for lack of credit, loss of consumer confidence and other reasons over which an individual business owner has no control.
Cash-flow imbalance is the leading cause of business failure in a healthy economy, according to the U.S. Small Business Administration. So when the economy is ailing, it’s more urgent than ever to maintain a balance between what’s flowing into the business and what’s flowing out.
In business, cash truly is sovereign. It’s used to pay short-term bills, cover unexpected emergencies and invest for future business needs.
The way cash flows into and out of a business — the operating or cash cycle — is a matter of timing. Here’s how it’s supposed to work: Cash enters the business as capital through loans from creditors and investment from owners. Cash then is used to produce goods or services; it flows out to pay wages and purchase buildings, equipment, materials and supplies. Next it flows back to the business as payment for goods or services. Finally, it flows out again to pay taxes and debts and return money to owners before starting again at the beginning.
Gena Wilimitis, Investor Education Coordinator, NM Securities Division
New Mexico Lt. Gov. Diane Denish’s comments at the second annual Summit on Financial Education in April 2008 were prophetic: “As we head into an uncertain national economy, it’s more important than ever that people learn to be wise consumers. Knowing how to save and spend wisely, not to mention avoiding lending scams and outright cons, can help people get ahead rather than just get by.”
Nearly a year later, the economy has spiraled downward, and the skills that Denish talked about — knowing how to manage credit prudently and how to save and invest for the future — have become a matter of survival.
In an effort to help the state’s residents protect themselves from fraud and improve their financial literacy in such challenging times, the state Securities Division is teaming up with AARP New Mexico, the New Mexico Coalition for Financial Education and the Focus Foundation to sponsor the third annual daylong Summit on Financial Education on April 10 at Hotel Albuquerque.
The conference will feature a variety of workshops and seminars designed to improve the money-management skills of New Mexico residents. Its target audience includes new investors, workers nearing retirement, college students, employers and seniors.
Bernice Geiger, New Mexico Securities Divison
The financial meltdown that’s depleting the savings and income of millions of Americans presents special risk to the estimated 16 million adults who support themselves while also caring for dependent children and elderly parents.
“Millions of adults are facing a generational sandwich that’s putting an economic squeeze on everyone involved,” said Bruce Kohl, director of the New Mexico Securities Division and chairman of the North American Securities Administrators Association’s new investor education program. “Nearly half of those in the so-called ‘sandwich generation’ don’t have enough money to finance their own retirement but consider paying for their children’s college tuition a parental responsibility, all while juggling the rising costs of care for their parents.”
Given the increase in life expectancy, Kohl said, “You’re looking at millions of stressed families across North America. We’re concerned that this stress may make the sandwich generation more susceptible to fraud, depleting the financial resources they need to maintain their families.”
Sandra Taylor Sawyer, Director, NMSBDC at Clovis Community College
One of the documents commanding lots of a business owner’s attention in these anxious days of recession is the balance sheet, which provides a snapshot of a business’s financial health on any given day. Regular review and analysis of the business’s balance sheet and other financial data allows an owner to avoid being blindsided and offers him or her an opportunity to change course before a business is in danger of failure.
Anatomy of a balance sheet
Every balance sheet has three major parts: assets, liabilities, and owner’s equity. The sum of liabilities plus the owner’s equity must always balance with the assets — thus the origin of the term “balance sheet.”
Assets break down into two categories: current assets and fixed assets. Current assets are those that will convert to cash in a year or less; they include cash, accounts receivable, supplies and inventory. Fixed assets consist of the business’s property, including buildings, equipment and fixtures. These assets have a life expectancy of longer than one year.
The second balance-sheet category, total liabilities, is defined as debt the business owes. Liabilities are broken down the same way total assets are: current liabilities are those to be paid off in a year or less; long-term liabilities are debts that will take more than a year to pay. Current liabilities include accounts, taxes and notes payable. Business loans and mortgages on property are classified as long-term liabilities.
Paul F. Goblet, Financial Advisor, NMSBIC
When free markets are in free fall, the federal government can intervene and keep the country and economy running by simply printing more money and running a deficit. That’s what lawmakers chose to do last fall to shore up collapsing financial markets.
Small businesses don’t enjoy such powers. They can’t print their own money, and most realize that running a business in the red is risky even in the short term.
Businesses owners face unprecedented challenges in today’s far-reaching recession. Many are being forced to reevaluate where they stand and where they hope to be in the future, and some are being forced to ask for help from consultants or lenders, even though the prospect is embarrassing to them.
Most businesses in New Mexico have fewer than 25 employees, and most of these are owned and financed by the founder and family members. Their growth depends on the business’s success and financial stability; when one or both of these are threatened, the business often loses its ability to get credit at affordable terms.
Paul F. Goblet, Investment Advisor, NMSBIC
New Mexicans who hoped that the Treasury Department’s Troubled Asset Relief Program would benefit small businesses by making it easier and cheaper to obtain credit are finding that only a few of the nation’s largest banks received infusions of taxpayer-financed capital — and the ones that did seem reluctant to part with it.
Instead, the state’s businesses are finding lenders reducing or withdrawing credit lines in reaction to the nationwide economic slowdown and to fears that local businesses will suffer from reductions in retail and government spending.
Web of woes
When the word recession is used frequently enough, everyone begins to believe it. Workers assume their jobs are in jeopardy so their families spend less and save more, and this has a dramatic impact on the economy. State and local governments cut programs as tax revenues fall, and banks tighten credit standards, reduce credit availability, and sometimes stop lending.
J. Roy Miller, State Director, NM SBDC Network
It’s a safe assumption that most of the companies doing business today didn’t include recession-survival tactics in their plans for 2008-2009. This means that the assumptions underlying their business plans are probably outdated, even for companies launched just a few months ago.
That’s how quickly things can change in a global economy buffeted by unstable financial markets, tightened credit and faltering consumer confidence. And that’s why forward-thinking companies maintain their advantage by having and progressively updating a written business plan.
For some businesses, the dramatic scenery change of a deepening recession means that the sales assumptions in their original business plans are now overstated and unrealistic. Other businesses — the lucky ones that stand to profit in a slow economy — have business plans that understate their possibilities for expansion and revenue growth. Either approach — over-reaching or under-reaching, based on an invalid business plan — could endanger the unwary business owner.
To increase the chances of surviving this financial winter, companies should revisit the long-term and short-term portions of their business plans and adjust in light of changing circumstances. Those in charge should consider the following:
Julianna Barbee, Director, New Mexico Small Business Development Center at Northern New Mexico College
Marketing is essential to the growth and success of any business, yet it seems to be the first part of the operating budget that managers slash when revenues dwindle and the economy gets unpredictable. Understanding and appreciating the role of marketing can prevent business owners from making the mistake of viewing this type of outreach as a dispensable luxury.
Whether you conduct business in a small, rural area or the global market, some principles are universal:
Marketing is all about the customer. To meet your customers’ needs you have to know those needs and know how your products or services will help them. Figure out ways to communicate with customers and persuade them to choose your services or products through creative marketing.
Standing out amid the information-overload din. On any given day, people are exposed to thousands of marketing messages through advertisements on TV, radio, billboards, newspapers, magazines and the Internet. To win the competition for your customers’ overtaxed eyes, ears and wallets, your message has to stand out amid all these appeals, and that requires creativity, a marketing budget and careful consideration of your target market and the best media channels to reach it.
Julianna Barbee, Director, New Mexico Small Business Development Center at Northern New Mexico College
With the crisis in America’s financial markets now metastasizing around the globe, many entrepreneurs are making a return to business basics part of their strategy for survival. Among these essentials are a determination to succeed, a positive attitude, flexibility and willingness to act quickly and decisively.
Here’s a more specific look at some core principles and how they can be applied to your business:
Productivity. Never stop thinking of how to increase productivity. Increasing return on equity means increasing the financial results and outputs relative to costs and inputs. Look for ways to increase sales, revenues and profits at lower costs.
Customer satisfaction. Be clear about how your customers define satisfaction, and know what they really want, whether it’s speedy service, quality service or access to those in charge. Every business has both external and internal customers, and satisfying these people is indispensable to success. If your customers are happy, they will buy from you again or use your services again, and they’ll tell their friends about you.