Conducting a Business Stress Test

By: Joe Romeo, Senior Business Development Representative, Hennessey Capital

As the nation has observed the government bailout process, I would like to think we have learned one thing – conducting a business stress test is a valuable exercise.  We watched government require the banks to undergo stress tests to make sure they could survive the most difficult market conditions – what did we learn?

It’s important to evaluate just how fragile your businesses truly is and gauge if your business has what it takes to weather an economic storm. This is where a “self-administered stress test”  comes into play.   
 
 This exercise is a key part of “strategic contingency planning” which will
test your operation under the most extreme, worst-case scenarios.  What is the potential impact if key aspects of your business outlook change?

The “self-administer” component is a key part of the test.  You do not need an outside consultant to help you through this process - you know your business best and can determine events would be most devastating.
Pose a few “what if” questions to your executive team:

• What if business revenues dropped 25%?
• What if price competition forced you to drop your prices by 20%?
• What if your biggest customer defaults?
• What if you lost your two largest accounts?

Run the numbers and see what your balance sheet looks like. How could the results impact your financing relationship?
 
The exercise of doing so may be a bit sobering but will prove wise.  This should be a part of every businesses strategic plan.  A contingency plan is critical to your survival.
 
Delaying ambitious business growth objectives in favor of establishing a rainy day reserve that can sustain the business through an extended down period would be prudent.
 
The days of unbridled growth and “the sky’s the limit” attitudes may not be gone, but should be tempered with other market-place realities that could occur.
 
to succeed in 2010 and beyond requires a new approach.  Thus, I offer 3 tips to prospering in a tough economy:  

1. “Assume the position.” In the confusion of these uncertain times, people are looking for some direction. Assume a leadership position and be bold enough to lead the way
2. Include a business stress test as part of your strategic planning
3. Over-deliver extraordinary customer service and exceed expectations. Get outside your business’s  comfort zone to defy the status quo and customize your product or service to fit your customers’ need
      

Insight on the banking community’s stress test:

http://www.nytimes.com/2009/02/26/business/economy/26banks.html?_r=1

http://www.cbsnews.com/stories/2009/02/25/eveningnews/main4829645.shtml?tag=currentVideoInfo;videoMetaInfo

When it Makes Sense to Hire a Turnaround Consultant

By: Jeff Wright, Senior Vice President, Hennessey Capital

In my 27 years in the asset-based lending and commercial loan workout business, I have observed many companies experiencing significant problems with operating performance. In a typical scenario, these businesses endure a substantial decline in revenues and/or are dealing with costs that are increasing at a higher rate than revenues. Management is often slow to begin cutting overhead expenses. Losses and tight cash flow frequently trigger covenant violations with their lenders who, in turn, to take steps to protect their security interests. When this occurs, it may be time to consider hiring a turnaround consultant.

Many companies, however, use the excuse that they can not afford an outside consultant or they can handle the task internally. It is important to recognize that even the most talented businesspeople can benefit from the support and guidance of an experienced consultant.

Hiring a consultant can provide an unbiased, independent opinion of the company’s current position. When tough decisions need to be made to reverse downward trends in operations and changes must be implemented and monitored, consultants can analyze the business decision from a position of greater objectivity. Moreover, some of the “change” burden can be handled by the consultant so that management can focus on the day-to-day responsibilities of running the company.

The most common benefit to hiring an outside consultant is access to his or her experience. The consultant can draw on that field experience to fill gaps in the management team’s skill set and develop and implement a plan that has worked in a similar situation in another organization. Other benefits include the consultant’s ability to draw on sources in their network for advice, and to connect with potential customers, suppliers, investors, or buyers. Many consultants also have relationships with a variety of lenders and can help in negotiating favorable restructuring agreements.

The overlying take-away here is that cash is king. The ability to improve cash flow is the consultant’s primary objective, so that the company can continue as a going concern, grow the business, and take advantage of new opportunities.

The Risk of Undercapitalization

By: Toby Dahm

A horrible week came to an end with the worst moment of all - Jay had to inform his employees that he could not meet payroll that day. Instead of focusing on quoting new work, Jay had spent this week fielding calls from angry suppliers seeking payment and tracking down his company’s own balances due from customers.  His business had run out of cash.

I see this scenario played out all too often, in companies big and small across the country. The whole world watched it unfold as General Motors and Chrysler came to the brink of financial disaster. What enabled Ford to continue executing its business plan while General Motors and Chrysler endured seemingly endless scrutiny, extraordinary professional fees, and months of distraction?  In a word: CAPITAL.

Having sufficient capital enables a company to sail through rough seas and
concentrate on steering out of the storm rather than fighting the storm itself. It doesn’t matter how good your product is, how many sales opportunities are around the corner or how efficient your operations are if you can’t pay your bills. That’s right – if you can’t pay your bills, it’s all for naught.

Having capital is as important as having a keen grasp on every other of business management that inspires an entrepreneur to go into business and succeed.

Step 1
The first step in establishing capital is to know how much you will need.  A good business plan will address the capital need conservatively.  It’s important to have contingency reserves because Murphy’s Law is very real – if something bad can happen, it usually will.  There are many resources that provide assistance with a business plan including State and County Agencies that do this at no cost or low cost. You may want to check out your local SBTDC or SCORE office.

Step 2
The next step is to approach funding sources that are appropriate to your life cycle stage and industry.  Trusted advisors, such as your accountant, attorney, mentor, as well as the above mentioned government agencies can also help you with this. You may be asked to give up substantial ownership, which you will have to weigh against the risk of operating with insufficient capital, as our friend Jay did.

If you find that capital is limited, you will need to adjust your business plan to succeed on the smaller capital base.  This usually translates into slowing your growth trajectory.  If you find yourself in that position, remember that slow and steady usually wins the race.

As you build your business, keep in mind that capital is critical to making the entrepreneurial equation work.

Keys to Enhancing Profitability

By: Joe Romeo

Profitability is an essential ingredient for business success, but too often leaders focus on the wrong things.

When it comes to price avoid competing on price alone

Strongly market your competitive advantage (create one if needed) to differentiate yourself from the competition; avoid competing on a price-only basis.  Continually work to set yourself apart from the competition so you have a value-add that defies the price-only evaluation.

If you are forced to lower your price to stay competitive,  focus on lowering your cost, not your profit. Certain market dynamics are inescapable so be sure to recognize and optimize them.

ELASTICITY

The price of a product or service normally enjoys an inverse relationship with demand for that product; work on ways to lower the price of your product without compromising profit and let the market dynamics work in your favor as demand and sales increase.

PROBABILITY

The branch of mathematics that studies the likelihood of occurrence of random events in order to predict behavior.

Be sure to measure and evaluate your business properly.  Your bread and butter deals/customers are more constantly predictable than are those long shot, random chance  deals and should be weighted accordingly when setting your marketing strategies. 

Play the odds and put the magic of probability to work in your business - don’t leave it to chance.

CULL

Continually cull your deals/business to identify and “cut” the low profit/low margin business.  The traditional bell curve applies here and your bottom 10-20% profit product/service/customers should be eliminated.

STRATEGY

Employ a simple strategy:  keep doing  what works (is most profitable) and cut your losses (least profitable business) quickly to minimize your lowest margin deals.

Keep in mind, Peter Drucker tells us: “Effective Executives work on the right things.”  This is an important mantra to keep in mind as you look to enhance your company’s profitability.  Get additional insights from renowned business consultant and writer Peter Drucker.

Preparing for New Growth Opportunities in a 2010 Economy

By: Mike Semanco, President, Hennessey Capital

When we do see the light at the end of the proverbial tunnel, companies need to be prepared to handle the pent up demand which builds in challenging times.  Business owners have spent the last 18 months streamlining operations and cutting where possible.  Now is the time to begin planning for new opportunities so that when they arrive at your doorstep, you can welcome them in versus turning them away.  There are two critical needs which small business leaders are concerned about- access to capital and talent attraction. 

All signs indicate that credit markets will remain tight throughout 2010 so entrepreneurs need to be prepared to consider multiple sources that can work in tandem to meet their funding needs.  This means your working capital lender will probably not handle your real estate loan or equipment loan.  It may also mean that the cost of capital may be higher than in the past but with new opportunities in hand; the cost of saying “no” will be greater than the new cost of capital.  In regards to talent, the key will be finding individuals with the right skill set.  Candidates will need to be multi-dimensional and be required to take on new projects outside their comfort zone.  Companies will want to maximize their hires and accept the fact that overstaffed businesses are a thing of the past.  Consult with your professional advisors to get the most out of new opportunities.  Survivors will thrive if they are prepared.

Asset-Based Lending Grows in Popularity

An article from this Tuesday’s Wall Street Journal highlights the flexibility  that asset-based lending provides.  Weezabi LLC, the company highlighted in this story, is a prime example of how small businesses can use an asset-based line of credit to say “yes” to new business opportunities. Read the article

Five Reasons Why 2009 was a Good Year for the Commercial Finance Industry

By: Mike Semanco, President, Hennessey Capital

I don’t deny that 2009 was an exceedingly challenging year for businesses of all sizes. However, 2009 may prove to be a watershed year for the commercial finance industry. 
 
The economic crisis and simultaneous traditional credit drought created an opportunity for the commercial finance industry to step up to the plate and be recognized. The ability of many commercial finance companies to say “yes” to lending when many banks were saying “no,” often meant the difference between a business maintaining its position in the marketplace or closing its doors.
 

1. The industry reminded the business community why factoring and asset-based lending have a 500 year history as it stepped up to finance small to medium sized businesses when traditional lending was either tight or non-existent.
2. Asset-based lending and factoring garnered increased media attention this year, helping to educate business owners on the availability and value of such lending vehicles.
3. The industry gained a new level of respect because of the expanded role it played in commercial lending and was able to significantly reduce the stigma associated with the use of factoring and asset-based lending, further burying the “lender of last resort” moniker.
4. The industry benefited from the fallout in the broader financial services industry, presenting the opportunity to tap into some outstanding talent to further grow companies within the commercial finance field.
5. With more business owners taking advantage of the benefits of factoring and asset-based lending, users of commercial finance are now more likely to share first-hand experience on how commercial financing vehicles helped sustain or grow their business

A look at the annual Commercial Finance Association conference

By: Jeff Wright, Senior Vice President, Hennessey Capital

 

I recently attended the CFA Annual Conference held in Las Vegas. The theme throughout the conference was “Opportunities. With the current lending environment being what it is and access to capital tougher to acquire, plenty of opportunities exist for asset based lenders to help both small and mid-sized companies finance their working capital needs.

 

The event was highlighted by the key note speaker, Condoleezza Rice, sharing her experiences as the Secretary of State. She stressed that free trade is critical and that the U.S will be led out of the recession by the private sector investment and their willingness to take risk. Ron Shapiro, author of “Power of Nice” discussed how to be prepared. His eight-step methodical approach to being prepared and out performing the competition is

1. Understand your objectives
2. Plan with precedents
3. Know of alternatives
4. Define the interests
5.  Set your strategy
6. Do a timeline
7. Pick your team
8. Write a script

SBA Lending: Down But Not Out

Although SBA lending is down sharply in 2009 compared to 2008, the movement of new activity as of late, is a positive sign of good things to come.  Even a slight increase in activity will give entrepreneurs some level of hope that a bigger credit thaw will happen in 2010.  In the meantime, entrepreneurs need to be creative and think outside the bank box for financing solutions.  Asset-based lending, factoring, PO financing and equipment leasing will continue to be viable solutions to today’s financing challenges.

Credit Shortage Threatens Supplier Growth

Detroit Free Press writer Susan Tompor sheds light on the challenges that lie ahead for small to medium sizes businesses, particularly in the manufacturing sector. As analysts proclaim that the recession is over, how do small manufacturing shops access the capital they need to re-set production and re-hire workers? Read the article

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