As tough as this recession has been, I see nothing but good, even great, opportunities for smart businesspeople in the kitchen and bath industry. To finally get your operation “lean and mean,” to diversify into new products and markets, to gain market share over the competition and to earn more value from a key industry organization to which you belong are but a few of the opportunities that present themselves now.
But none of these is more important than the opportunity for dealers to forge tighter bonds with key vendors. The need for each other’s support is paramount for both parties to emerge from this deep recession relatively unscathed and prepared to grow again.
Yet in my travels, I encounter dealers who have made egregious mistakes – perhaps, but not always – due to stress from the tightening vise of this economic decline. I also encounter dealers who are unsure about how to communicate particular situations they are facing that would impact their vendors either directly or indirectly. Following are some common questions I have heard and the actions I have coached owners to take.
- Will telling a vendor that your firm is downsizing throw up a red flag? On the contrary: I believe a vendor would respect an owner even more for developing a viable written budget and business plan. All too often, small businesspeople fail to take action quickly enough. That you would take the initiative, and make calls to both reps and factory executives to personally announce the details of the down-sizing, would be welcomed.
What does send up a red flag is when a vendor learns of major changes in a business through the grapevine. Invariably, details are either ambiguous – or filtered – which can create a near panic in some instances.
- What if you owe $50,000 (or more) to a key cabinet vendor, and the credit manager wants this paid off before processing your next order? Time for some serious planning! Actually, you would be rather late. Because if you had capitalized your business adequately, budgeted it properly and reviewed your financial statements carefully every month to see what they are saying about the state of your firm’s financial performance compared to budget, you wouldn’t find yourself in this untenable and embarrassing position.
It’s every owner’s responsibility to be properly capitalized at all times. Vendors should never be put in a position of serving as your bank, since it imperils both your business relationship and your operation’s viability.
Once a business is underway and making profits, the owner’s first financial objective should be to build an Emergency Fund equal to at least six months of fixed overhead expenses (which includes the owner’s salary). Twelve months would be ideal. These profits should be invested in a liquid portfolio, meaning that the assets can be converted into cash within a matter of days. Real estate, of course, is not considered a liquid investment. This fund should be separate from the owner’s retirement account(s). Ultimately, this strategy is no different than what a professional money manager would recommend with respect to your own personal finances.
That said, a 3-Month Cash Flow Forecast – updated weekly – is the best management tool to address this accounts payable situation. Professional crisis managers consider it the fundamental report absolutely necessary to successfully navigate a recession. A variation of this report – extended to 12 months – would also be a key document in a presentation binder to convince bankers that your firm is a worthy risk for a long-term loan and/or credit line. Please contact me directly if you need a Cash Flow Forecast and an explanation of how to implement it.
Once you have developed this 3-Month Cash Flow Forecast, you will be in an informed position to discuss realistic payment arrangements with the vendor’s credit manager. It’s unlikely that the $50,000 can be paid off in one lump sum unless you were able to secure additional financing. But if you use customer deposits (i.e. 50% at contract signing, 40% upon cabinet delivery, and 10% upon substantial completion) for working capital purposes like most dealers do in this industry, you should be able to pay down this debt over a few months. If you are a valued customer, and you show solid proof of judicious financial planning, most credit managers will work with you to arrive at reasonable arrangements that are good for both parties.
- What if you don’t receive a customer deposit in time to make a promised vendor payment? Pick up the phone and call the vendor’s credit manager immediately. If he is compelled to call you to find out where his money is, he will begin losing confidence in your firm. Before long, your account would be placed in collections, and even the best of selling skills won’t be enough to have your cabinet orders released for production and/or shipping.
Conversely, if you have an updated 3-Month Cash Flow Forecast in place, you can intelligently and confidently project the next, most realistic date when the credit manager can expect a check – and for how much. Accurate communication and personal integrity are the cornerstones to preserving a strong business relationship in these unprecedented tough times.
- What if you have to close your doors knowing that you still owe money to key vendors? It takes courage to make the calls, but that’s what you must do if you still want a decent livelihood of some form in this industry. If your firm goes down without warning, you will be treated as a pariah for years to come. Indeed, you may never live down the stigma. It’s not so much that your firm failed during the worst economic decline in the last 80 years, it’s how it failed – without notice – that will be the sticking point.
As painful as this process will be, you need to articulate your showroom closing plan. If your displays have not been used as collateral in securing a bank loan, then offer them back to specific vendors to help pay down your debts with them. If you had to sign a personal guarantee in setting up the original account, be prepared to negotiate a satisfactory resolution to any outstanding debt – or face a possible lawsuit.
The Right Plan
In conclusion, business owners in the kitchen and bath industry don’t plan to fail, most just fail to plan. If you don’t have an adequate business plan on paper, feel free to contact me. I would be pleased to give you a free financial analysis and 30-minute consultation. It’s my way to give back to an industry from which I have learned so much, and prospered, over the last 40 years.