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Where do you stand if the coronavirus hits hard?
Some people are looking for the economy to take a hit from the coronavirus. Is this inevitable? It’s correct to take some precautions – but some are already predicting a turnaround in China where it all began. Personally, I think in the next 2-3 weeks, we’ll see some positive information on the facts of what’s happening.
Here is MY version of how you should prepare for the worst, assuming you are in business.
If you are in business and you don’t have a squeaky clean and accurate balance sheet, you may be doomed if you experience an extended pull back in business.
Your income statement, as each business person knows, reveals how much money and profits you are currently making and what you have been making in previous months.
Your balance sheet, however, is a snap shot for a particular date and reveals how well you can weather a downturn in business.
The balance sheet is made up of assets, liabilities and capital. You need assets put in place to generate income. You fund your assets either by assuming liabilities or with capital.
Now, if your liabilities are heavy, you may have trouble funding those assets if a downturn in business occurs as mentioned above. That’s why assets need to perform – they need to generate enough income to pay off the monthly debt created by liabilities.
But if you have a pull back in sales, you may have fewer dollars in the bank, you may have fewer accounts receivable that generate monthly income and you may have to consider selling off some assets which hopefully will reduce your monthly obligations from your liabilities.
Folks, this may be a bit technical here unless you are into “numbers”. But when I worked in accounting, I ate this stuff up. That’s why accountants are called “bean counters”.
We say, “Okay we OWN so many beans, we OWE so many beans and we either have beans left over or we are in the hole”. You can go in the hole for brief periods of time depending on how strong of a balance sheet you have before you start digging yourself in a hole.
The first thing in cleaning up a balance sheet is to get the “cash in bank” right. If the cash in bank isn’t right – there ain’t nothin right. You could be off ten dollars but that could represent being actually off millions of dollars one way and then the other way plus or minus ten dollars (don’t ask me to explain this right now).
When I worked in Chicago, my company was paying an outside firm big bucks for doing some cleanup work on several bank accounts. The young person attempting to do this was unable to get one statement reconciled and that person ended up in a “session” or two that brought about some tears and heavy sobbing.
I found out what was going on (I was doing invoicing at the time for large scale projects) and I told my boss, “Let me take a look at the statement”.
He gave it to me and in short order I found out that the bank account could not be reconciled because the young person had a beginning balance that was different than the ending balance for the previous month.
Folks, that’s almost like buying a dozen donuts from the bakery for 12 people and then returning to the office with only 10 donuts! It just doesn’t jive (and it’s bound to cause a ruckus).
What I’m saying is, if you are in business, get your balance sheet perfected. Don’t just look at your cash in bank. There’s some talk about our economy taking a hit from the Coronavirus (CoVid19), as mentioned above.
Personally, I think things are a bit overblown – but you never know.
This may be the perfect time to get your balance sheet in order and it will take time. Instead of just wondering if you can survive a downturn in business find out for sure. Given a certain amount of information, you can project how long you can survive IF things go south.
Please don’t panic on some of the stories you may hear unless you enjoy beating yourself up.
Just get prepared.
What does all this have to do with a freight brokerage? Well, allow me to explain.
If you are in trucking with one truck or a large fleet – or if you are in business where capital acquisitions are heavy – you definitely need to manage assets and liabilities.
If you are in brokering, however, the only assets you need to manage are your accounts receivable and the only liabilities you need to manage are payments to the truck. So, you are looking at not only getting a 10-20% margin between the two, you have to “work” your receivables.
You can’t pay bills with accounts receivable so you have to turn your receivables into “receipts”. That means you set up terms for collection which may be 30 days or may be 10 days – it’s up to you. Some brokerages can handle terms for collection for longer than 30 days but I never encourage beginning brokers to accept terms of 45-60 days and even 90 days unless the company is chock full of cash.
Forget about using factors if you are just beginning. They can chew your profit up quicker than a beaver in a wooded forest.
When your customers start extending the time for paying you, it’s actually like a downturn in business. So, brokers, please keep on top of your receivables. Get them converted into receipts as fast as you can. And if you think you can handle extended terms for receivables by extending payments to the truck, think again.
These good carriers that may have been working very well with you may be heading over to another brokerage where they can grab their cash faster.
In my training, I provide two handouts – a spreadsheet and video – where receipts and disbursements are projected over the next 3-4 months. You can’t just look at your cash in bank because that always changes depending upon your receipts and disbursements and it doesn’t give you the “bird’s eye” view that you need.
I don’t have that spreadsheet attached here but I do have a video that explains how you can set up estimated activity for cash receipts and disbursements for a 3-4 month period. You can easily project cash shortfalls and shortfalls are what you want to avoid.
Go here now for the video: