Political and economic gurus are all struggling to answer one of the most pressing questions today, "Are we in a recession, on the other - the dreaded double dip"
In my opinion, only time will tell. But that's not really the issue or issues that you as a small business owner should focus on.
The question is, "Can your company survive another recession or economic slowdown?"
A quick and easy answer to this question is through a calculation of the single financial ratio called the safety factor.
The relationship of the security measures a company's debt-equity or their ability to cover its debts immediately in case of need.
The debt, in this case means not only products, such as bank loans or credit card debt, but all liabilities of the company.
The reason for this relationship is important is that when economies and declining consumer (companies and individuals) to withdraw their spending, companies face declining revenue, to pay its debts and other obligations.
If a company can not pay their obligations as suppliers, vendors, rent, salaries, utilities, etc., then the company becomes insolvent and must close the doors.
To measure the ratio of their security company, just take and divide total liabilities by total equity (both BSI).
As mentioned, total liabilities may include any bank or out of credit card debt (short-term and long term), as well as accounts payable to suppliers and vendors, payroll liabilities, tax liabilities or any expenses earned.
Equity usually comes in two forms - injections of money from the owners, partners or outside investors, capital or the performance of retained earnings (net income) in the business.
As a general rule, this ratio is usually between 1.50 and 2.00. But the higher the ratio, the higher the business risk of a recession or slowdown. If your relationship is over 3.00, it means that your business has three times the debt or obligations, it does in equity to pay these obligations and may mean that your business is in trouble, regardless of status economy.
If you find that its safety factor is greater, then it should be, or even if you just want to reduce dependence on its business of debt and better position which should take another downturn, here are four ways to improve your debt to equity:
1) Use any and all cash reserves in the business to pay its debts, including liabilities that are not directly adapted to the assets that can be quickly converted into cash.
Examples:
He used a business loan to finance part of the team and the team currently has a fair market value of $ 10,000 sellable. Then make sure that the balance of this loan is $ 10,000 or less.
Or, you have $ 10,000 in accounts payable to suppliers, but also has accounts receivable more than offset accounts payable.
Note that in a recession some of its accounts receivable will be uncollectible. Therefore, make sure you have at least 1.25 times the amount of accounts receivable to accounts payable - in this case, you must have at least $ 12,500 in accounts receivable to cover accounts payable $ 10,000 Accounts. Otherwise, pay your accounts payable or accounts receivable increase solid customer.
2) Pay off all bank accounts or similar debt, come in all current and payroll tax liabilities or at least spend cash (to pass to a separate account not to touch) for liabilities and sell unused or underutilized equipment and use the funds to reduce debt tied to those assets.
3) Increase equity in the business, either by putting in more equity themselves or seeking outside partners or investors who pump money into the business.
4) Increased corporate profits by rising prices, if possible, sell more and better push-point margin and reduce operating expenses or expenses that are not critical to your business.
The goal here is that the profits of their business does more, to retain the profits of the company can keep the company to handle any uncertain future event.
Now, it is true that our economy will double dip in the near future. Nor is it true that we go into another recession, your business will fail.
However, understanding the potential risks your company might face and know the security posture of their company to address any questions you can almost guarantee that if another recession realize your small business is one that survives to fight another day .
