If you’re like many small business owners, you may be experiencing economic volatility for the first time, and that can be daunting. Your instincts may be telling you to pull back, reduce inventories and staff, or even to get out while the getting is good.
But before you do anything drastic, there’s something you should know: the economy will eventually get better. In the meantime, there are many things small business owners can do to navigate choppy economic waters and position themselves for growth when conditions improve.
To spend or not to spend? Conventional wisdom tells small businesses to cut back on spending during downturns, particularly high-ticket items and expansions. In some cases, that is sound advice. But, thanks to some attractive tax benefits in the government’s economic stimulus package, this might be the best time for some companies to make capital investments and substantially reduce their 2008 federal taxable income.
In a nutshell, the federal government is providing additional tax benefits for equipment and other items purchased this calendar year. More specifically:
- Beginning in 2008, many small businesses can now instantly depreciate most or all of the cost of equipment, software and other new and used assets the very first year they are placed in service. Most depreciable business assets (other than real estate) qualify for this expanded deduction.
- Small businesses will also be allowed to depreciate 50 percent of the cost of any new asset purchased and put into use in 2008. This First-Year Bonus Depreciation provision covers investments in new vehicles, equipment and improvements to leased property, among other things. For some major purchases, the placed-in-service deadline is extended to December 31, 2009.
What might this mean for your business? Depending on the size of your purchases, it could mean many thousands of dollars in tax savings. Factor in today’s attractive interest rates, and your major purchases might suddenly be a lot more affordable than they would have been a year ago—or will be a year from now. Keep in mind: there is no guarantee that either of these programs will be extended beyond the end of this year.
Is now the time to get out? During periods of economic instability, some owners begin to think their time might be better spent on a tropical island, far away from the challenges and stresses of running a business. But is a down market the best time to sell a business? Often, it is not—especially if your business volume is down and you want to get the best price. Others are in the same boat as you, making now a much better time to survey the market landscape for opportunities. If the market is tight, your suppliers and vendors, for example, may reward large-order commitments with better pricing and terms. Equipment suppliers may throw in more extras than usual. Don’t be afraid to negotiate for what you want, and take advantage of supplier discounts for prompt payment.
Now may also be a good time to look at suppliers, vendors and competitors as potential joint venture partners or acquisition targets. If your company sells medical databases, for example, and your vendor helps companies integrate new software into their enterprises, together you might create a turnkey database solution which you can market to the world. Joint ventures can be separate corporations, but can also take the form of joint marketing agreements with few legal bonds.
What if cash flow is a problem? When cash is tight, some business owners bury their heads in the sand. But owners can take proactive steps to stave off trouble with suppliers, landlords and other creditors.
The best time to talk to your creditors about your bills is BEFORE they are due. Your chances of persuading creditors to extend your payments are greater if you speak to them before they start sending collection memos. Keep in mind, your vendors may be experiencing financial difficulties of their own. In that case, your payment history will either hurt or help you during these negotiations.
Similarly, you will also need to keep a closer eye on your customers, even long-time ones. Checking in to see how they are faring during the downturn helps avoid surprises and can lead to new opportunities. It’s particularly critical to follow up with customers who are behind on their payments and be willing to negotiate where appropriate. Within months, a struggling customer may again become strong—and they’ll likely remember those who were willing to work with them during the downturn. If you can accommodate such situations without damaging your company’s financial position, everybody wins.
Above all else, the important thing is to keep your eyes and mind open to the opportunities that come out of volatility. Every cloud has a silver lining. Sometimes you just have to search for it a little harder than others. TPW