I have a client I have been coaching and counseling now for nearly a year. The very good news is they have survived during that year. Their business is a retail business and they are located in two malls in a part of the country that is not in as bad shape as other parts. Sales in 07 were down about 20% from 06. The 21 year old business was profitable in 06 and break-even in 07. 2007 was when the downturn started in the economy where their stores are located. 08 gross revenues were about 20% down over 07. The owners put a great deal more of their own funds into the business in 08 and followed much of my advice.
My advice going into the prime retail season of 08 was to keep margins as high as they could but still have promotions to get customers into their store. They did an awesome job managing their inventory. Although Christmas sales weren’t as good as we hoped, they wound up the year with a low inventory value and a high balance in their checking account. Late in December I advised my clients that if we could not get the mall to reduce rent, they were not likely to make it during 2009. Rent as a percentage of gross revenues for 2006 was nearly 30% for 2008. I calculated that it needed to be down at around 14% of 2009 projected gross revenues for 2009 in order for them to have a break-even year, which is our goal for 2009. After contracted negotiations with the mall owners, we were able to get rent reduced.
I helped my client start using a weekly cash flow forecast (you may download here) to help them manage their cash. In most retail businesses January and February are the two slowest months of the year. March for my client is usually a very strong month. We made it through January and February, in part by laying off all the part-time staff we could. The two owners are working 90% of the hours and are opening the store most days. Even with all the cuts in expenses and rent, the stores still lost a tiny amount of money in January and February.
Both owners are tired and have periods where they think the lights have been turned off at the end of the tunnel. Last night (Sunday) one of the owners called me at 10pm. I normally would not take his call that late, but I was working to prepare for my week. He was an emotional wreck. He needed to talk about how he was going to make it.
As calmly as I could and with a little tough love, I told him that we had made it this far; now is not the time to jump off the ship. I reminded him that we needed him to manage his business by looking at the financials and working his cash flow forecast, rather than watching CNN and all the negative news on television. I told him to walk past and not look at the empty stores in his malls that had padlocks on the doors because they had not paid rent. I told him to first give the other owner two consecutive days off this week, because the other owner had been working many more hours. Yes, it would mean that he would have to cover the hours, but that is one of the costs of owning your own business. You work when you have to.
After he was calmed down, he had agreed that our cash flow forecast did show that we would have enough cash to keep the doors open during March and April. He did agree that it wasn’t helpful to his health or business to manage by emotions.
The take away from this anecdotal story is that 1) it is okay to be scared, many other business owners are in the same shoes as you are 2) Have a plan and work your plan, 3) Have a cash flow forecast and keep it up to date on a daily basis, 4) Do the best you can and try to think outside the box about ways to help keep your stress level down. This recession is 17 months old and although no one knows when we will hit the bottom, everyone knows we will hit bottom and times will get better. We just have to hang on until then.
Sam Thacker is a partner in Austin Texas based Business Finance Solutions.
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