SURVIVING IN A DOWN ECONOMY

To survive in a downturn, entrepreneurs need to get back to basics. The key to weathering the slow times is positive cash flow. To accomplish this, you'll need to develop cost-cutting measures and income-generating tactics. While it's probably not possible to make your company entirely recession-proof, these strategies can help your business weather a lean business climate.

Improving Cash Flow

As the economy slows, it's important to pare down expenses. But be careful because this can be a balancing act. The secret is to cut the fat but not the essentials. Here are some tips to help navigate the tricky waters of cash-flow management.

Review customer credit lines. Stay in touch with your customers and keep up with industry news that could affect their businesses. You'll also want to scrutinize new customers more closely and possibly set reduced credit ceilings until a solid relationship is established.

• Expedite fulfillment and shipping. The sooner a product is shipped, the sooner it can be billed.
• Bill promptly and accurately. Fix any bugs in your system. Problems with an invoice can delay payment beyond standard terms. If possible, send an invoice with the order to prevent delays in getting it to the customer. Consider offering prompt payment discounts.
• Monitor collections closely. Follow up on past due accounts as soon as they're overdue. Be aggressive but also work with your customers. Often, a customer that doesn't have enough funds to cover the entire amount at once won't pay anything. If that's the case, find out what the customer can pay and create a payment schedule.
• Deposit payments promptly. If you take deposits directly to the bank on a daily basis, you'll discover problem checks more quickly. To speed up the process, consider renting a post office box or lockbox.
• Seek better terms from suppliers and banks. To make sure you're paying the lowest possible price, investigate discounts and special pricing offers.
• Maintain credit lines with banks. During economic downturns banks sometimes reduce or restrict credit lines. To maintain your credit lines, keep your banker informed of how well your business is performing. Review the terms of your loan/credit agreements. The amount of credit may be determined by the amount of accounts receivable; if A/R drops, your available credit may be reduced.
• Maintain tight controls on inventory. Keep only as much merchandise on hand as you need. Consider ordering small quantities but in amounts large enough to qualify for discounts.
• Evaluate expenditures on a line-by-line basis. As you go through the list, ask yourself if an item can be eliminated without affecting the business. If the answer is yes, consider doing without it.
• Pay bills on time, but not early or late. If you have funds to pay early, ask about a prompt payment discount.
• Consider postponing large capital outlays. When weighing options, move ahead only with projects that are vital to your company's operations. Look into negotiating better rates or prices.
  

Finding Hidden Niches

All the penny-pinching maneuvers in the world won't make up for poor sales revenue over an extended period of time. That's why it's important to make an effort to uncover hidden marketing opportunities. Since a good customer is hard to find, begin looking for additional sales possibilities with your existing customers.

A simple but effective marketing tool is to keep in touch regularly with your customers. A quick phone call may open doors to new sales. Start the dialogue by asking, "How's your business?" or "How's our performance?" These questions serve a dual purpose. They can act as troubleshooters, revealing potential problems in the business-customer relationship. But more important, they can help you discover additional products or services that customers want but you aren't currently providing.

Your marketing endeavors don't need to be a solo effort. Sales growth can become a companywide activity, pulling in personnel from all levels of your organization. Employees can be the company's eyes and ears in the community, being on the alert for new business opportunities. To create a teamwork environment, develop employee promotions to reward workers who drum up business. As a further encouragement, establish commissions or increase current commission levels.
As you seek new opportunities, increase your company's exposure in the community and within your industry. Organize conferences with guest speakers or attend trade shows. Take advantage of these opportunities to seek out alliances with other firms. Joint ventures can be particularly effective in a recession because they spread the risk amoung several concerns.

Although a slow economy might not seem business-friendly, it can be a challenging and rewarding time. The companies that survive, or even thrive, during downturns are those that generate ideas and adopt innovative processes.

NEW ACCOUNTING RULES FOR GOODWILL

New Financial Accounting Standards Board (FASB) guidelines change the way businesses account for goodwill and other intangible assets. Under FASB Statement 142, businesses are no longer permitted to amortize goodwill acquired in a business combination. Under the new rules, goodwill appears on the financial statement at carrying value unless and until its value becomes impaired.

Goodwill is the premium that a buyer pays for an entity, i.e., the difference between the purchase price and the value of the assets. This amount appears as an asset on the balance sheet.

In the past, it was assumed that goodwill, like most assets, decreased in value over time. To show his reduction, companies were required to amortize goodwill on an annual basis over a period not to exceed 40 years. The charge appeared on the expense statement, affecting profit and loss, and on the balance sheet, decreasing the carrying value of goodwill.

Improved Goodwill Reporting

This accounting treatment proved of little use to anyone analyzing financial statements. In fact, knowledgeable investors and lenders simply overlooked goodwill amortization. In issuing the new standard, FASB stated that one of the reasons it changed the accounting treatment was to provide financial statement users with better information about intangible assets.

Under the new rules, goodwill is considered an asset with an infinite life and will remain on the financial statements until something specific happens to impair it. At that point, the value will be written down and the income statement charged for the impairment loss.

FASB 142 requires companies to determine if goodwill has been impaired. This evaluation needs to be done annually, on the same day every year (more frequently under certain circumstance). While this puts a burden on the company to measure impairment yearly, there is a provision that if significant changes have not taken place, the evaluation doesn't need to be done.

Impairment Test

To determine impairment, the company must evaluate each reporting unit, or business segment, that generated the goodwill. Although the test needs to be done on the same day, the company can select the day to do the measurement and select different dates for each reporting unit. In this way, it's possible to spread the evaluation process over a longer period of time.

FASB offers specific guidelines on how to test goodwill. It involves a complex valuation model under which goodwill is written down only if it's "implied fair value" drops below its carrying amount. CPAs and valuation experts will be invaluable in identifying appropriate reporting units and determining the fair value of goodwill and other assets.

Statement 142 applies in fiscal years beginning after December 15, 2001, regardless of when the goodwill was initially recognized (early adoption is available for entities with fiscal years beginning after March 15, 2001). Companies with goodwill on their books must perform a "transitional impairment test" within six months of initial adoption of the statement (by June 30, 2002, for calendar year companies).

FASB 142 also requires companies to make additional disclosures about goodwill. For instance, if there are changes in the carrying value of goodwill, the reasons for the change need to be explained in a footnote to the financial statement.

Until the new rules have been effective for several years, it will be difficult for financial statement users to make year-to-year comparisons. But over time users will be able to observe changes in goodwill and discover the reasons for the changes.

MORE BUSINESS ELIGIBLE FOR CASH METHOD

The small business community got a boost late last year with an IRS proposal to expand the class of businesses eligible to use the cash method of accounting. Under Notice 2001-76, qualifying taxpayers with between $1 million and $10 million in average gross receipts (measured over a three-year period) will not be required to account for inventories, a process that requires the accrual method of accounting. The IRS provided relief to taxpayers with average gross receipts of $1 million or less under Notice 2001-10.

The proposal will simplify record keeping for a number of businesses, including many health care providers and construction contractors that sell products in connection with providing their services. Previously, it was unclear whether these businesses had to use the accrual method of accounting, which requires income to be reported in the year earned and expenses deducted in the year incurred.

The selling of a product is one of the criteria requiring use of the accrual method. The IRS took the position that these businesses sold a product but a number of court rulings disagreed with that stand. The courts held that in those cases, the product was an indispensable part of the service and not inventory. As a result, these businesses can now use the cash method, recording earnings and deductions when cash is received and paid.

Safe Harbor Provisions

Under the proposal, a taxpayer with average gross receipts between $1 million and $10 million may use the cash method if it qualifies under one of the following safe harbors:

• Its principal business activity is not mining, manufacturing, wholesaling, retailing, or information services, such as book and newspaper publishing or sound recording.
• Its principal business activity is providing services, even if the taxpayer is providing goods in association with the services.
• Its principal business activity is custom manufacturing.

Regardless of the taxpayer's principal business activity, it may use the cash method for a separate and distinct trade or business that falls within one of the above safe harbors, provided separate books and records are kept for the separate trade or business.

Although the new rules won't be finalized until later this year, the IRS will allow a qualifying business to switch to the cash method as early as the 2001 tax year. Note, however, that although the cash method offers tax-saving opportunities for many businesses, it isn't right for everyone. Before changing accounting methods, consult your tax advisor to conduct a thorough analysis to determine whether you're eligible and to evaluate whether the cash method would produce favorable tax results.