This article is Part 2 of a series outlining the 90 best practices of successful family and closely held businesses and the actions which allow companies to weather economic storms. The 90 best practices don’t necessarily appear in order of priority, and, due to your particular circumstances, some of the practices will be more or less valuable to your closely held company. They will not be presented as exhaustive analyses; rather, each article will touch on a few of the best practices with a very brief explanation. More depth on each of the topics is as close as doing internet research or making a phone call to The Family Business Institute. As you read the series of articles, please try to select the highest impact practices upon which to focus. Trying to get your mind around all 90 best practices simultaneously would be like trying to enjoy a drink of water through a fire hose!

The best practices will be concentrated in five distinct categories: 1. Cash flow, 2. Belt tightening & cost reduction, 3. Processes & systems, 4. Opportunities, and 5. What to avoid or of what to be wary. We hope this series is beneficial in helping you prosper in tough times.

7. Forecast a rolling 13 week cash flow projection (Cash Flow)

Cash flow budget worksheets can be adapted to any business of any size. Assuming one has a pretty good handle on future inflows and outflows of cash (and this might take a bit of homework on the part of businesses which haven’t undertaken cash flow analysis before), it’s reasonably easy to forecast future cash flows and anticipate potential problems. Unfortunately, this tool is incredibly underutilized in most entrepreneurial companies. Protecting yourself in hard times means that closely held company leaders must become intimately familiar with the concept of cash flow and must be able to predict it with stunning accuracy. A cash flow statement is sort of a compressed corporate checkbook analysis. The resulting cash flow projection is a management tool which helps a company anticipate and avoid liquidity problems.

8. Invoice your customers more frequently (Cash Flow)

Invoicing your customers more frequently means that you’ll have opportunities to collect their payments sooner. Let’s look at the example of an accounting firm. A CPA meets with his client on the first of the month. On the last day of the month, the firm generates in voices. Customers have 30 days in which to pay the invoice. What this means is that the accounting firm has delivered services for which it might not be paid for approximately 60 days. By going to weekly invoicing, the firm can invoice the client at the end of the first business week and collect the client’s money three weeks or more sooner. While this sort of practice may have been problematic in the old days of paper and pencil accounting, most companies today have the technological capacity to do invoicing at least weekly if not even more frequently.

9. Drop poor paying or PITA (pain in the “neck”) customers (Cash Flow)

In hard times, family and closely held businesses need to be focused on their core businesses and their highest pay off activities. Taking time and investing emotional energy in pain in the neck customers or customers who don’t appreciate the work you do – evidenced by their slow payments among other things – may not be worth it.

10. Sell underutilized assets or assets not producing return on investment (Cash Flow)

In the last 20 years, we have visited thousands of family and closely held businesses. An all too common phenomenon is to observe vehicles or equipment which are idle. We often hear people say, “We don’t really use that boom truck very much anymore, but on the occasions when we do need it it’s nice to have around and, after all, it’s paid for.” Even if a hard asset like a vehicle is paid for, it still represents a cash flow opportunity. Say a company needs to utilize a boom truck four times per year, and the cost of renting a vehicle is $1,000 per day. The company could rent what they need for $4,000 a year. The value of the vehicle at liquidation is $12,000. That means they could rent the vehicle when needed for three entire years and still have all their needs met while enjoying the additional cash right away. In hard times, review the opportunity for selling underutilized equipment or leasing out underutilized space in order to generate precious cash.

11. Borrow money from the corporation’s cash value life insurance policies (Cash Flow)

Suppose a company undertakes the 13 week rolling cash flow projection that we advocated above and finds that they have a need for liquidity in four month’s time. Given the turmoil in the financial services industry today, it may not be feasible to go to the hometown bank in order to secure a loan. Many closely held companies have cash value life insurance policies which have accumulated significant value over time. It’s possible to borrow some or a great deal of the cash from those policies – and best of all you don’t have to qualify. For companies who worry that in hard times they may not be able to qualify for a commercial loan, cash value life insurance may be a real opportunity, and it may solve pressing cash flow issues.

12. Charge and enforce late fees and monitor customer’s inappropriate uses of trade discounts (Cash Flow)

When the economy is in hard times, it means that not only might you be feeling the pinch but your customers likely will too. They may be unable to pay your outstanding invoice within a 30 day timeframe. If you’re not in the habit of doing so, begin charging late fees on customer’s outstanding balances. You shouldn’t be serving as a lender of last resort to them any more than they would like to be doing the same for you. Also monitor whether your customers are inappropriately utilizing trade discounts. Many times a customer will pay an invoice on day 30 of the billing cycle and still take the 2% net ten discount you offered for early payment. Stop this practice, and make sure you’re getting paid the appropr i a t e invoice amount.

13. Seek shareholder loans (Cash Flow)

Referring again to the enlightened family business which has adopted the practice of forecasting a rolling 13 week cash flow and has discovered a need for credit to sustain working capital, perhaps the family might be a source of loans. Maybe Granddad started the company many years ago, has long since retired, and has had his stock redeemed by the corporation. Depending on Granddad’s personal financial situation, he may be willing to loan some of his wealth back to the company in hard times. One should approach family members on a matter like this in a businesslike way and make a business case for why it’s a good deal. One should also document the agreement carefully so both sides will be protected from a legal standpoint and won’t inadvertently create any income or gift tax problems.

In every downturn, some companies not only survive but prosper. We earnestly hope this series will help you reach your fullest potential.

The 90 Best Practices for Recession Survival (and Maybe Prosperity): Part 3 

Wayne Rivers is the president of The Family Business Institute, Inc. FBI’s mission is to deliver interpersonal, operational and financial solutions to help family and closely-held businesses achieve breakthrough success.
January 2009