When you’re the next domino

Consultant Art Rebrovick says ‘it’s important to get your story straight’ when addressing cash flow issues with your bank. Matthew Williams/The City Paper

The post-holiday hangover has given a number of local business owners a serious headache they can't shake.

More than 400 Nashville-area businesses filed for bankruptcy in 2008 and a number of high-profile cases early this year suggest many more will occur this year. The credit crunch and dismal retail sales have forced many stores, restaurants and companies — local, regional and national — to shut down. Late last week, Circuit City became one of the biggest casualties so far when it said it will liquidate its more than 560 U.S. stores.

Such filings cause ripples with small suppliers and service providers, who from one day to the next are forced to do without a chunk of their revenue stream. To cope and avoid becoming the next domino to fall, local experts say entrepreneurs must take swift but smart action.

Step one: Fess up

A thinner client base immediately puts pressure on a business' cash flow and can quickly derail a small company.

“You have to be very careful in understanding cash flow, and that's even more important today because the banking environment is so treacherous right now,” said Art Rebrovick, a business advisor with NMG.

Business owners must look at how the disruption will affect their day-to-day operations, primarily their ability to pay the bank, vendors and employees. Open and honest communication is key to dealing effectively with all three parties, Rebrovick stressed.

“Most likely, a small to mid-sized business is going to have a banking relationship where they have outstanding loans, so it's important to get your story straight so you can be clear when communicating with your bank,” he added.

Owners are inclined to avoid going to lenders and vendors with bad news like the loss of a client or cash flow problems. But the sooner a company can honestly breech the subject, the quicker it can work out a feasible pay schedule.

“It's not always fun to call someone up and say, 'Hey, I can't pay you this month. It's going to take three months,'” Rebrovick said. “But it's better to have that conversation than for them to call you in a month and a half and say, “Why haven't you paid the bill?'”

Small changes can add up

Less cash will almost inevitably lead business owners to have to cuts costs. But they should a major slash and burn of the budget. Deep cuts in operations will impact a company's ability to do business. And if advertising is cut or an experienced — and expensive — employee is axed, it could hinder future growth and profit opportunities.

“You need to look for a group of smaller cuts,” Rebrovick said. “That's going to take more time and more headache. But if you can make a group of smaller cuts that add up to a big one, you sometimes can have less impact on the business long term.”

Once immediate cash flow problems are addressed, entrepreneurs should remember to sweat the small the stuff. Important — and perhaps surprising — among the details: Businesses should not forget to follow up on the unpaid invoices they have from former clients.

“I think there has been an attitude by many creditors over the years that bankruptcy is not worth the effort, that you don't make anything out of filing claims,” said John McLemore, a bankruptcy attorney with Garfinkle, McLemore & Walker.

The law requires a bankrupt entity to schedule all of its debt, but according to McLemore, 50 to 60 percent of creditors won’t fail to file claims for their money. It won’t produce an immediate payoff and the court process won’t always fully reimburse creditors, but filing is the only way businesses can legally recover what’s due them.

For that reason, McLemore, who was the bankruptcy trustee in the Barry Stokes/1Point Solutions bankruptcy, says every small businesses should have an employee who knows how to file creditor claims — and knows how to do them right.

“Filing a claim means attaching the supporting documentation,” McLemore added. “The note, the security agreement, in the case of a business loan, the UCC1 that lists the business collateral, or in the case of a real estate loan, the deed of trust.”

Check the market

An economic downturn and the loss of customers also provide small business owners the “opportunity” to retool their long-term strategy. Instead of watching financial problems pick off their clients one by one, entrepreneurs need to be active and take an honest look at whether their target market can still support them.

Such an analysis should start by asking why companies are closing their doors, said KraftCPAs' Kevin Crumbo.

“Are there very systematic industrywide reasons those customers are starting to fail? Or are you in a bad geography for a particular business?” he said. If a company's original plan will no longer put business in the books, it's time to look elsewhere.

One alternative: Going global. Crumbo has seen small and mid-sized companies pursue that sometimes daunting option.

“I'm watching wholesalers of food products and music that have had primarily a customer base in Tennessee and the surrounding states start to look overseas for brand new markets,” he said. With the dollar’s value falling relative to many other currencies, exporting is a particularly attractive option.

However, if 2009 follows in the dismal footsteps of 2008, companies with smaller client bases might be forced to file for bankruptcy themselves. If such is the case, the sooner owners do so the better.

McLemore said his firm has been bombarded of late by skittish owners looking for advice. But many are reluctant to accept the possibility that, even as a good number of them are dealing with the effects of others’ bankruptcies, they themselves may have to file. That, it seems, is a part of the story they can’t get straight.