Wow.  September has truly been rocky for our economy.  Many of the most recent deals and sells will go down in history as some of the largest failures in history.  I’ll comment on the outlook for small business at the end of this post, and how the small business can best weather this storm.

Of the four largest investment/brokerage banks (Lehman Brothers, Merrill Lynch, Goldman Sachs, and Morgan Stanley) in the US, only Goldman Sachs and Morgan Stanley remain as Wall Street investment/brokerages banks are continuing to file for bankruptcy or being bought out.  Lehman filed for bankruptcy protection recently because it could not court a suitor to buy it, though Bank of America was reportedly interested at one point.  The federal government set a precedent when it helped Bear Stearns go through a takeover by JP Morgan Chase back in March (to the tune of $29 Billion).  But there was no such guarantee on the horizon for Lehman Brothers; and this because the federal government would not guarantee the ongoing losses for the would-be purchaser, as they did in the Bear Stearns case.  Why the federal government is involved in guaranteeing these purchase loans is beyond me.  I didn’t authorize this in my last meeting with Bernanke and Paulson.  Nonetheless, Barclays of London is now going to buy the remaining assets and premises of Lehman for $1.75 billion dollars.  And as of today, Goldman and Morgan stock values slid some 20% and 28%, respectively.  They’ll probably hook up with banks soon too to make their balance sheets look better, and avoid the inevitable drag into the mud.

Whats more, Bank of America went on to buy Merrill Lynch for some $50 Billion dollars.  In late 2007, Merrill was having trouble with tons of investments in mortgage-backed securities, and finally decided to sell as opposed to being dragged down like similar brokerage/investment bank houses in America.  This will make Bank of America the largest brokerage house in the world with some 20,000 advisers and an estimated $2.5 trillion in client assets.  Merrill will continue to operate under their name, but with stronger asset-backing from the biggest bank in America.

Now we see the federal government coming to the rescue again with the bailout of the American International Group (AIG).  They will prop up the company with an $85 billion dollar loan so as to (again) try to stay a run on our economy (but with a huge interest rate cost to AIG).  This bridge loan will give the federal government an 80% stake in AIG, and give it power over some future decisions within the company.  The thought is that if insurance companies go under, those citizens relying on that insurance send troubled fears throughout our economy (and world) on unprotected assets and income, along with the inabilities to meet insurance claims obligations.  This bail out still does not seem to make the markets feel all warm and fuzzy (as denoted by today’s trading activities).  But how long will the prop last?  If the company is insolvent, isn’t it still insolvent even though it has a new owner (the federal government)?  Isn’t it even more insolvent now that it has a new $85 billion dollar loan to contend with?  Sounds like the federal government is pretty poor at deciding where it invests its money.

A lot of these troubling issues began a few weeks ago when the Treasury department took over the management of two large mortgage companies, Fannie Mae and Freddie Mac.  With mortgage default rates climbing rapidly for the two quasi-governmental entities, these two organizations were headed to trouble without intervention.  Fannie Mae and Freddie Mac lubricate the mortgage industry by buying up mortgages from other lending institutions around the US.  The housing slump was beginning to takes its toll on these institutions, and now the federal government has the authority to inject money into the troubled companies by buying up stock with “self-created” funds.  If you need money to buy stock, just print it.

These are some troubling times with the future quite murky.  What can the small business owner do to stay the effects of the broader economy in their own company:

Understand who you are.  Large companies used to give us the security we so longed for.  Now, smaller companies, along with self-employed businesses, are sometimes much safer investments.  Smaller companies can turn around quicker, make quicker decisions, make wiser decisions, enter new markets within months, or exit lagging markets immediately.  Our safety is in the small guys now.  Congratulations to the micro businesses who make our economy safe and worth working in!

Watch the interest rates.  These tend to affect small businesses quicker than larger companies.  That is, if your rates go up on your credit line, then your payment on the loan will immediately go up the next month.  This can cause immediate cash-flow problems.

Wait on capital investments.  Related to the point above (and the point below), capital investments usually depend on new loans, and therefore, interest rates.  Riding out this economy for another year will probably prove to be a wise choice, and will let you make better decisions when interest rate volatility is not so high.

Watch your renewals on your annual credit lines with the bank.  A non-fixed payment loan can be called by the bank at any time, depending on your agreements with them.  If you are a company that continually posts losses, and a failing bank has to cut it’s losses, it may just call your loans to get as much as they can from your failing company.  If you are propped up by credit lines, you may be in a dangerous position, especially if you are with a potentially rocky bank that doesn’t like the type of industry you operate in.  We don’t hear about it much, but banks do call loans.

Grow with cash, not debt.  Right now, creating growth with more debt is probably not a good idea.  It is sometimes a viable alternative to future growth and moving into new and exciting markets, but it can strap you when the economy as a whole stops buying.  Hold off on future growth plans unless you can do it with available cash already in your business bank account.

On the other hand, expand NOW if you can.  Somewhat related to the above point, you should expand now if you have the cash to do so.  Thinking about new lines of revenue to get in to?  Do it now when everyone else is shrinking.  Need to spend money on marketing (and you have the cash to do so)? – do it now while everyone else is cutting their marketing budget (an easy budget to cut in hard economic times).  You see an exponentially greater increase in your business when you can expand while the overall economy is shrinking.  You get more for your dollar – products and servies can potentially be bought at bargain prices since everyone else is trying to generate cash in their company too.

Grow the bottom line, not the top line.  To create more money in your business, you should shift your focus to the bottom line – where the profit resides.  When trying to generate more cash, try cutting costs as opposed to just increasing sales.  Cutting costs adds that saved dollar directly to your bottom line, whereas increasing sales means you have to pay for people,  product and/or other general and administrative costs before you ever get a dollar to the bottom line.  Depending on your industry, only 5% to 15% of each top line dollar (sales) ever even makes it to your bottom line in cash profit.  Cut your costs NOW, and increase your profits (and thus, cash).

8  Cash is king.  That is a mantra we often speak in our firm while teaching and training our clients.  Don’t make decisions that hurt your cash flow.  Now more than ever, make decisions that help you keep your cash in the bank.  Things like offering longer terms to larger customers, or working with vendors that demand up front cash payments can find you lacking of that vital commodity when payroll time comes around – CASH!  Begin thinking how each of your decisions affects your immediate cash flow, and how you will recover from the effects of slow payers, new monthly payments on car loans, outstanding receivables, etc.  Giving someone your cash now is NOT an isolated incident.  That move can make for hard decisions one or two months down the road (or longer), when you really need that cash for investment, payroll or buying better positions in your market.

Don’t worry about your home loan.  If you default, the federal government will come to the rescue of the mortgage bank you stick it to, and ultimately bail you out with an offer to swap your loan for a more affordable one.  That’s a joke (or maybe you should do all of us a favor, and not take on any mortgage debt you can’t actually pay for).  It will help the overall economy in the long run.

10  We have probably NOT reached the bottom as an economy.  Who knows when the economy will turn around (I sure don’t).  It’s projected that the end of 2009 is at least as long as we’ll have to wait until we see the US economy start to rebound.  The phrase to drill in your head right now is WAIT.  In any decision you are making, the decision to WAIT is never a decision you can’t eventually greatly benefit from or recover from.

Let me know some of your thoughts on your small business, and feel free to pass along our article to help other microbusinesses out.  Take care.

Thanks, Jason M. Blumer, CPA

P.S.  The first 25 blogs to link to this post or link to their blog via a comment here will receive an autographed copy of the Hermanisms book by John L. Herman, Jr.  His book is awesome and full of wonderful Axioms for Business and Life.  You won’t want to miss this book.  Just let me know where your post is or leave your comment here and we’ll get in touch with you.  Thanks.