Keep A Cool Head, Seek Balance In Today’s Economy

OCEAN CITY – Faced with lingering market volatility and a lagging economy, more and more small and midsize businesses are sitting tight and amassing large cash reserves. While this defensive approach is understandable, it may carry opportunity costs that could crimp development down the line. A better approach to emerging stronger from this economy is to keep a cool head and seek balance: Think strategically, spend wisely and invest prudently.

“Anything done to excess—including a cash conservation strategy—might have ill effects,” says Joe Poy, Director with Merrill Lynch Pierce Fenner & Smith Incorporated in New York, who frequently refers clients to Merrill Lynch Commercial Finance Corp. for business loans. “Failure to maintain inventory could hurt if a competitor goes out of business and your sales pick up suddenly. Likewise, delaying the maintenance or replacement of equipment can hurt long-term production and competitiveness.”

Smart spending in a downturn should help you keep your competitive edge and position yourself to expand when recovery arrives.

“There’s still a need to maintain market share in a downturn. Product quality and durability may become more important in some businesses. In others, low pricing may be the key. Businesses have to be able to react to these shifts,” Poy says.

But before you move on any strategic spending, you’ll need solid financial forecasting to analyze your company’s current and projected cash flow. “Conservative but active management of corporate cash is especially important for business success in a slowdown. By forecasting cash flow needs—such as accounts payable, payroll and taxes—a company can predict quite accurately what will be available for important short- and intermediate-term investment,” says Jana Land, Director with Merrill Lynch Commercial Lending & Investment in Alpharetta, Ga.

Forecasts also help you anticipate challenges and monitor performance, so you’ll need to look beyond day-to-day projections. In particular, to use all your available funds, watch for dwindling reserves in your cash balances and your line of credit. Also, if you are starting to delay paying your accounts, or if some of your clients file for bankruptcy or suppliers increase prices, you may need tighter cash management.

You should also consider having fast access to cash in case business conditions worsen, whether to keep your business stable or to seize an opportunity. “It’s prudent to have some type of credit facility in place to protect you from unexpected changes in business—such as loss of a major client or lengthening of accounts receivable. While a line of credit is a common facility, securities-based lending is an option, whereby you borrow against the value of personal assets,” Land says. Before you decide to connect your personal assets to your business, talk to your financial advisor about assessing all the risks involved, especially in a tightened liquidity market.

You will need every tool at your disposal to enhance your business as the economy slows. Proactive cash management could help you navigate turbulent times more confidently. Make sure that any surplus funds you find will contribute as much income as possible. And consider liquidity needs and principal protection, Land says. “If you have cash you can hold beyond one week, look at other taxable and tax-exempt variable-rate demand obligations, commercial paper, and certificates of deposit.”

(A Merrill Lynch Senior Financial Advisor. She can be reached at 410-213-8520.)