Business moves in cycles. Into late 2007,
we saw a volatile stock market, good
interest rates and a generally good economy. However, there are signs — the
increasing national deficit, a slowing in housing and auto markets, and the consumer
credit card crunch — that indicate we are
moving into an economic slowdown.
Smart Business spoke with Dennis
Gramann, a vice president in the business
banking group at Fifth Third Bank in
Cincinnati, about how an economic slowdown can present opportunities for the alert
business manager.
Is it a good time to buy capital goods?
A company’s ability to purchase capital
goods is dependent on the strength of its balance sheet. Companies with sufficient working capital and a strong debt to worth ratio
have capacity to take on additional debt and
allow for capital expenditures. The opposite
is true for companies with a weak balance
sheet. They will look to sell assets to reduce
debt to improve cash flow and improve margins. They may even be looking for someone
to acquire the business. There are always
winners and losers in an economic downturn. Companies who control expenses,
watch margins and make smart capital
investments prior to downturns are primed
for expansion when the economy turns for
the better. They have greater flexibility and
capabilities to grow their businesses.
Is it currently a good time to sell commercial
real estate?
Anyone who reads the paper sees that the
residential real estate market is hurting. It is
not a great time to sell homes. But the commercial market has shown remarkable stability so far. Of course, the local market dictates the situation. There are areas of expansion and growth that will drive the commercial market values upward and produce
strong sales activity.
What about interest rates?
The belief here is that the prime rate may
drop another quarter at the end of the year.
We hope that will spur some economic incentive for business growth. Long-term rates
have not had any dramatic change in the
recent past. You might see short-term rates
go down even more depending on the Fed’s
view of the economy and inflation. Overall,
long-term rates are still fairly low.
How can you keep your best workers happy?
If you look at the business models today,
the majority of companies are going to performance-based pay. They offer a good base
salary with incentives and bonuses based on
what the employee brings in the door or contributes to the company’s bottom line. It’s
always a good idea to pay good people for
what they contribute. But, there are other
areas to examine. Look at all of your expenses — employee expenses, insurance costs
and other overhead expenses. Go to your
vendors to get materials costs down. Make
sure that all of your customer relationships
are profitable ones. This process can make
for difficult decisions , but it is necessary to
allow the company to be a viable business.
What advice are you giving customers about
planning for sales growth?
The place to start is to look at your niche
market and see what successes and failures other businesses in that market have had. If
you are in manufacturing and fabrication in
the auto business, you might want to revisit
your projections. In other industries, the
economy may be going strong. Your individual industry is the paramount concern when
planning sales growth. But good companies
always find ways to go forward. Talk to your
banker and to your accountant. They can
benchmark your business against others in
your industry. Look at your current ratio,
working capital, debt-to-worth. If you are in
line with other companies in your field, you’ll
likely come through okay. If you are not,
work with your banker and accountant to
see what changes can be made to improve
your company’s financial strength.
Do slowdowns mean the time is right to buy
competitors out?
The answer is yes. There could be some
excellent buys with very little premium. This
might also be a good time to look at increasing market share, since the competition
could be priced out of the market. But you
can’t stay stagnant — look for diversification.
Is it a good time to refinance lines of credit?
Lines of credit are risk-based and based on
a company’s strength. If you think you
deserve a better rate, go ahead and ask for it.
But it is not a given.
What other opportunities should a manager
look for during a downturn?
Look at opportunities in other areas related
to your basic business. You might be able to
use your current equipment to expand into
another product line. Diversify. There will be
opportunities when other companies fall by
the wayside. Smaller businesses can do only
a little of this, larger ones more. Or, partner
with someone in another industry with similar processes or process requirements.
Diversification will help maintain the revenue stream in a downturn.
DENNIS GRAMANN is a vice president in the business banking
group at FifthThird Bank. Reach him at [email protected].