Debt Management: The 3 R's to Surviving a Recession

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Did you know that 45,000 businesses in the United States fail each month? And that 44 percent of small businesses used credit cards as a source of financing in 2008, compared to 16 percent in 1993, according to the Small Business Administration? Learn how to take a proactive approach to managing your debt and creating cash flow with out borrowing money. Join the National Restaurant Association, Nation's Restaurant News and SettleSource, Inc. for this free one-hour event. Learn more at http://bit.ly/dqfzkI .

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Debt Management: The 3 R's to Surviving a Recession

  1. 1. Debt Management The 3 R’s to Surviving the Recession Wednesday, Dec. 9, 2009 at 2 p.m. EST Moderator: David Koenig, director, tax & profitability, National Restaurant Association Panelists: Christine Janklow, President SettleSource, Inc. Sarah Lockyer – Financial Editor Nations Restaurant News
  2. 2. Disclaimer As part of the Association's continuing effort to educate and inform webinar participants, NRA members and the public, the Association has arranged these webinar sessions. Speakers and webinar Presenters are solely responsible for the content and accuracy of any materials they present; that the same contain no libelous or unlawful matter; and that they either own or have the right to use/distribute any materials presented at the Association webinar. Speakers and Presenters are also solely responsible for any statements and remarks they make and present. The Association does not give any opinion on or assume any responsibility for the content of any Speaker or Presenter's remarks, content or materials.
  3. 3. Introduction Today’s turbulent global economy has reduced sustainability throughout the business community. With large corporations and financial institutions receiving bailouts and even filing for bankruptcy protection, business confidence may be at its lowest point in decades. Effects are widespread and have lead to significant erosion in consumer spending, thus leaving thousands of small businesses in peril. Is there any light at the end of this tunnel? Yes! Proactive positioning can make all the difference between survival and demise. An old adage says it best, “No one plans to fail, we just fail to plan.”
  4. 4. Three R’s to Surviving the Resourcefulness: Necessary for businesses at Recession any stage. The ability to take what is In an effort to illuminate the available and make it better. reasons many businesses of all sizes are struggling we Resilience: What makes difficulties survivable. will cover both the causes Much of what makes a business resilient is it and effects of what can culture, attitude and preparedness for the disable any business from unplanned. thriving. No matter the cause, at the core of turning things Recovery: The will and ability to find a way around, there are three through difficult times and keep focused on common strengths referred the end goal of repairing and growing to here as the “3 R’s” that stronger than before. are key to surviving. These are part of entrepreneurial DNA, so use them and maximize them to elevate your situation
  5. 5. Five Reasons Businesses Fail 1.Loss of Revenue- Income is the reason most are in business, lost income and declining customer base may be due to circumstances beyond your control or other attributable factors, such as: • The current economic climate. • Your product pricing vs. competitive pricing • Reduced traffic to your location(s) • Declined customer spending (average tickets) 2.Poor Business Models – While losing revenue is problematic, it is most often because the original or existing business model is no longer viable. • Business planning (and measuring) is essential to insure that opportunity and competitiveness are optimized. • A business model must also be executed properly for the entity to realize revenue.
  6. 6. 3. Management/Operational Issues – As it goes, entrepreneurs by nature may not possess (or employ) the proper balance between ownership and management skills to balance internal and external dynamics that affect overall operations. • If internal management is insufficient, the effects are usually strongly and adversely reflected upon the bottom line. 4. Lack of Capital – To start and sustain, all businesses must have sufficient working capital. • As is often recommended in individual financial planning, a business should strive to maintain a balance sheet that can support 3-6 months of payroll and operational expenses. • Doing so is paramount in insuring a cushion will exist to manage unforeseen loss or crisis.
  7. 7. 5. Credit/Debt Issues – Many businesses have relied on access to easy credit in the forms of lines of credit, credit cards, loans and home equity lines of credit, to finance their businesses. • Small businesses are now struggling as a result of tighter lending, high rate credit cards, reduced lines and maturing loans, leaving many heavily burdened with mounting and high cost debt. • If there is a true culprit of financial distress it is DEBT. When there are payments due monthly even the smallest slump in the economy can signal the end of a business. I will discuss some facts about credit/debt and alternatives to provide relief and substantially reduce debt exposure during our discussion today.
  8. 8. Small Business and Debt Debt Distressed or  Reasons for Small Business Closures Underperforming Business Debt Statistics *20% estimated by Federal Reserve statistics for total credit card debt 2009 **Small Business Administration 2006 Closure stats Source: BusinessWeek-Data Buccino & Associates Independent study US Bankruptcy Statistics (+ increases from 2007)
  9. 9. Debt: How much is too much for my business? Any debt can be too much for a business not generating multiple times the principal and interest payments in added net profits attributable to the use of borrowed funds. This table illustrates acceptable levels of debt to capital for selected industries. Source: Standard & Poor’s
  10. 10. Small Business Financing Type Percentage Credit Cards 59% According to the National Small Earnings of Business 51% Business Administration 2009 Bank Loan 45% Small Business Credit Card Vendor Credit 30% Survey; This table describes Private Loan (Friends or Family) 19% the most common methods of Used no financing 19% financing used (within the last Leasing 7% 12 months) to meet capital Small Business Administration 5% (SBA) loan needs among its respondents. Factoring (Pledging Accounts 1% Receivable) Private Placement of Debt 1% Private Placement of Stock 1% Public Issuance of stock 0.5% Source: NSBA 2009 Small Business Credit Card Survey
  11. 11. Capital Constraints Credit cards are the leading source of small business financing. Credit cards facilitate easy access to capital, especially in the early years of a business. Small business owners have the least access to capital and are often left no alternative but to fund by way of revolving credit. This chart illustrates how capital constraints can affect businesses. Source: NSBA 2009 Small Business Credit Card Survey
  12. 12. Capital Trends for Hospitality Lending is still frozen for many: Look to regional banks, equity deals, equipment financing or landlord incentives for needed capital. National lenders and major banks are still saying no Seek debt-to-equity deals: There are investors on the sidelines that are willing to partake in this. Granite City was the latest to do this successfully Don't forget about angel investors or stealth capital. Redstone American Grill is expanding via investors that agree to finance the building of restaurants and the operator agrees to manage locations for a fee Source: Sarah Lockyer, Finance Editor Nations Restaurant News
  13. 13. Capital Trends for Hospitality – Cont. Continue to trim costs: With such reduced sales across the board, operations need to adjust to a new reality – Close underperforming locations Renegotiate leases Trim labor (but don't disrupt service) Review every P&L line item, work with suppliers to find new, lower-cost menu items Use technology to help drive efficiencies [California Pizza Kitchen, Ruby Tuesday, Wendy's have made great strides here.] Look for ways to provide Value -- a must have in today's market. While it’s a struggle to operate today, consumers are looking for value above all else. Operations that will succeed will offer lower prices, additional deals, added value to a meal, additional services, specials, etc. Join a purchasing co-operative. Smaller restaurants have been banding together in various regions to create more buying power among suppliers through purchasing co-operatives. Source: Sarah Lockyer, Finance Editor Nations Restaurant News
  14. 14. Survival Kits for today’s tough economy The Bellwether Food Group a firm primarily focused on strategy development and implementation with both Chain Restaurant Operators and Foodservice Manufacturers provides these key suggestions to retain and improve your customer base: Stay true to your brand and customers - Don’t try to be all things to all people – know who your loyal customers are and consistently exceed their wants and needs Innovation that supports your brand essence is critical to success - Products should reflect what your core consumers have loved about your menu - Your most loyal consumers want to experience new news Service the heck out of your loyal customers - The last thing you want to do is cut back on service - The most successful chains are improving their service rating to their core consumers Source: Bellwether Food Group
  15. 15. Survival Kits for today’s tough economy- Cont. Bellwether’s Jon Jameson says: “These times demand developing new menu items and LTO’s (Limited time offers) that your loyal consumers expect and want, at price points that reflect the current reality of the economy, while most importantly, reflecting the quality, integrity and flavors that your consumers demand from you.” “Although business has been difficult and revenues are down, the best brands and restaurants have a laser focus on exceeding consumer expectations in quality of products, customer service and new innovation.” Source: Bellwether Food Group
  16. 16. Survival Kits for today’s tough economy- Cont. Analyze your P&L to save pennies without ever reducing the overall experience of your core consumers Stay connected with your customer feedback – consistently find out how you are delivering the guest experience - Simple customer comments cards or ask them to go to your website and fill our a score card on their experience - Every week, study the guests data and determine how you can make it better the next Tough economic times are the best times to renegotiate contracts, leases and purchases Source: Bellwether Food Group
  17. 17. Debt Management • In this section we will focus on two types of debt; Vendor and Supplier and (Business) Credit Cards • We will discuss options to resolving Business Debt and provide specific examples of how various methods can provide relief. Source: www.settlesource.com
  18. 18. Five Options for Dealing with Debt 1. Pay as agreed – in full, on-time and according to payment terms. 2. Re-negotiate new terms – – Lowering payment amounts – Lowering interest rates – Extending payment terms 3. Consolidate – or “transfer” debt through low interest (secured) loan 4. Settle Debt – a method of paying reduced settlements though negotiating balances owed 5. Bankruptcy – a legal means of seeking partial or total debt forgiveness Source: www.settlesource.com
  19. 19. Coming to terms with Debt As in other areas of our lives and business, once we acknowledge a problem or issue and its causes, we are more empowered to deal proactively to find solutions. Depending on your attitudes toward money, business image and using credit for capital it is common to: 1. Feel embarrassed if your business suddenly – – Is unable to meet it monthly obligations with creditors – Is subject to diminished credit by existing creditors – Has been denied credit 2. Keep borrowing – in better economies we were able to cover mistakes easily by accessing more debt to pay old obligations. This only increases the problem. 3. Do Nothing – Because we can become easily overwhelmed by misinformation or our general outlook about a problem. We continue business as usual in hopes that thing get better. 4. Close or file for Bankruptcy – We also can be propelled by fear into seeking protections that may far exceed the actual responses necessary to fix the situation. Source: www.settlesource.com
  20. 20. Coming to terms with Debt It is important to acknowledge - 1. DEBT DOES NOT = DISASTER, DEMISE OR FAILURE! 2. YOU ARE STILL SUCCESSFUL! – You and your business were once and may still be worthy and successful enough to acquire the trade lines that have helped you grow and operate. – Acknowledge how things have change and what will be needed to recover 3. BE WILLING TO TAKE ACTION! – There are actions you can begin to take now to improve your finances and reduce your debt! 4. SEEK THE HELP OF A PROFESSIONAL! – There are many financial advisors, turnaround experts, commercial debt counselors and settlement companies that can take the burden off you by providing appropriate advice and services Source: www.settlesource.com
  21. 21. Minimizing Debt ACME Prepared Foods Monthly Cash Flow Analysis CASE STUDY: Cash Receipts $90,000.00 ACME Prepared Foods* – Monthly Expenses Purchase for Resale (51.4%) $46,260 Situation: Experiencing a drop in annual Rent Building & Equipment $8,500 sales revenue of 31% from last year. Salaries $24,400 Annual Revenue: $1,150,000 Payroll Taxes $3,250 Accounting Legal $1,200 Annual Expenses: $1,240,200 Advertising $1,600 Operating Office Supplies $5,367 Net Revenue: ($90,200) Insurance $1,250 Utilities/Phone $2,726 This exercise will get into how to create Auto Expense $694 cash by creating a repayment plan on Miscellaneous $175 vendor/supplier expenses to help Other Loans/Credit Cards $1,429 improve cash flow. While beginning a reorganizing plan to reduce overall Bank Loans (Principal) $5,667 expenses. Bank Loans (Interest) $830 TOTAL MONTHLY EXPENSE $103,348.00 Table 1.1 CASH FLOW FOR MONTH ($13,348.00) *Fictitious Example
  22. 22. Creating Cash without Borrowing In order for ACME to improve its cash flow, a vital step is to determine a repayment plan for creditors it is late in paying or not able to pay in full. This will alleviate pressures and risks due to aging or unpaid accounts. Most importantly it will provide operating cash and valuable time to work out a solution for the business, its top priority! ACME begins by selecting its largest open accounts for the month. It is going to defer payment on these accounts. The goal is to defer the maximum amount to allow a plenty of cushion and time to reorganize. Source: www.settlesource.com
  23. 23. Repayment Plan Table 1.2 on the next page, lists the total amount owed to each creditor, past due and days late. Step 1: ACME will divide the total amount owed by the maximum number of payments it calculates each supplier is willing to accept. Step 2: As ACME will notify each creditor in writing the reasons a payment plan is needed and specific steps it will take to fulfill it obligations with each creditor, they must: Be careful not to offer payment terms that can not be met Establish relationships with back up suppliers prior to negotiating with selected creditors Keep a few suppliers paid on time to use as future credit references when needed Negotiate with suppliers for better pricing, asking for discounts for COD or cash payments
  24. 24. ACME’s Creditor Repayment Plan Table 1.2 Creditor Total Owed Amount Past Due Days Past New Monthly No of PMTS Deferred PMTS Due Payment CASH FLOW CREATED Creditor A $75,445.00 $40,074.00 90 $6,287.08 12 $69,157.92 Creditor B $16,500.00 $12,750.00 120 $1,375.00 12 $15,125.00 Creditor C $7,325.50 $5,420.00 30 $610.46 12 $6,715.04 Creditor D $3,898.24 $2,435.00 90 $433.13 9 $3,405.11 Creditor E $5,834.02 $4,300.00 120 $972.33 6 $4,861.69 Creditor F $1,524.69 $963.00 30 $169.41 9 $1,355.28 TOTALS $110,527.45 $65,942.00 $9,847.41 $100,620.04 Example: Creditor A is owed $75,445.00, Acme will offer repayment in 12 equal installments of $6,287.08 each and include payment of first installment along with its written notification to Creditor A.
  25. 25. BEGINNING CASH ($13,348.00) Created Cash Flow CASH RECEIPTS $90,000.00 TOTAL CASH AVAILABLE $76,652.00 By establishing a repayment plan with its vendors/suppliers ACME Monthly Expenses: has achieved a realistic expense Payments to Vendors (Repayment Plan) $9,847.41 budget. Its beginning negative cash Purchases (Non-deferred) $2,456.00 flow ($13,348) has now been Rent Building & Equipment $8,500 nullified by the new repayment Salaries $24,400 schedule. Payroll Taxes $3,250 Accounting Legal $1,200 Instead of paying over $46,000 for Advertising $1,600 current purchases plus trying to Operating Office Supplies $5,367 repay past due invoices, ACME Insurance $1,250 pays only $9,847.41! Utilities/Phone $2,726 Auto Expense $694 This leave a substantial $20,608.59 Miscellaneous $175 cash flow without reducing any Other Loans/Credit Cards $1,429 other expenses. Bank Loans (Principal) $5,667 Bank Loans (Interest) $830 Most importantly the loss of TOTAL MONTHLY EXPENSE $69,391.41 $13,348.00 has been eliminated!! CASH FLOW FOR MONTH (Created cash without Borrowing) $20,608.59 ENDING CASH $ 7,261.00 Table 1.3
  26. 26. Renegotiating Leases This is an example of a percentage based lease As most lease negotiations are designed to protect this company from large influenced by the economic climate, cash outlays during bad months and gives now might be optimal to achieving the landlord incentives during better months favorable concessions with landlords. Company A: Sales down 60% from $58,000 monthly Some tips to approaching a landlord to $23,000 in just six months. are: -Troubleshoot by carefully reviewing your lease contract before negotiating In this extremely distressed and volatile case, protecting cash flow may require Company A to -Be organized and have financial statements in negotiate and its tie rent to graduated sales hand volumes - Be open and honest Example A: Incentive only lease structure -Make sure they understand that it is impossible Current Base Rent: $1,800 for you to continue with present lease terms 2% of sales less than $19,999 -Let them know (if true) that closure or more drastic measure may be necessary without a 3% of sales of $20,000 - $39,999 new arrangement 4% of sales of $40,000 - $59,999 (cap) -If possible provide landlord an incentive
  27. 27. Changes In Credit These are the most common changes experienced by business card holders as made by their credit card companies since 2008 These changes can wreak havoc for business card holders and prompt the need for changes that will accommodate repayment or prohibit non-payment. Source: NSBA 2009 Small Business Credit Card Survey
  28. 28. Dealing with Unsecured Credit Cards As over 59% of small businesses utilize credit cards for daily purchases. Of those, 16% carry balances over $25,000 in credit card debt, and 21% with balances between $10,000 and $25,000. More than 60% carry balances month to month. This poses danger when only making minimum payments, and subject to changes in terms as we will illustrate in a later slide. What can you do if this occurs? Begin my evaluating your new payment structure. If it is unaffordable than immediately contact your creditors: Ask them what can be done to lower interest rates Ask them if there are any “balance liquidation” programs available – most major lenders offer a hardship program subject to qualification If you are late on a loan or line of credit ask if there are any “forbearance” options to defer payments for a few months and add them onto the end term of the loan Source: NSBA 2009 Small Business Credit Card Survey
  29. 29. Commercial Debt Settlement Commercial debt settlement can be highly effective as a debt reduction tool. What is Commercial Debt Settlement? A legal and ethical method to negotiate reductions on balances owed on past due business debts. Usually best done by commercial debt arbitrators. How do I know it is a good option for my business? If you are currently unable to pay commercial credit cards as required, or have been unsuccessful gaining concessions, you can consider is the services offered by commercial debt settlement firms. How does it work? Rather than making monthly payments to your creditors, these programs negotiate lump sum settlements with your creditors, frequently reducing amounts owed by 50% to 60% of the principal balances. • These programs usually take only 2-3 years to complete, so this is a good option for a business with a plan to recover to rid itself of debt in a relatively expeditious manner. • In many cases the programs can also reduce your monthly payment toward your debt. Source: www.settlesource.com
  30. 30. How Commercial Debt Settlement Programs Can Help. A good debt settlement concern will involve an integrated approach of communication, education and financial management. It would also do the following: 1. Carefully evaluate companies to make sure they qualify for program eligibility 2. Assume all communications with creditors 3. Ensure regular communication with clients to manage progress 4. Make sure debts are negotiated in good faith, documented in writing then settled and paid as promptly as possible Other benefits of (utilizing) commercial debt arbitrators: They have experience, relationships and know when and how to settle They are a NUETRAL and OBJECTIVE third party making the tough decisions toward best outcome They negotiate dramatic reductions on past due commercial debts They preserve vital cash flow which keeps businesses solvent They save owners valuable time and stress dealing with creditors They enable owners to focus on their business Source: www.settlesource.com
  31. 31. Commercial Debt Settlement VS. Debt Servicing* – A one year cost/savings comparison based on $120,000 Business Credit Card debt owed. Debt Servicing (Minimum Monthly Payment Schedule) Monthly Payments Annual Balance Cash Flow Loss- Pay Down $3,600 $9,540 ($33,660) Annual Costs Debt Remaining Interest Accrued $43,200 $110,460 $22,092 Debt Settlement (Minimum Monthly Payment Schedule) Monthly Payments Annual Debt Cash Flow Gain + Settled $2,160 $40,000 $17,280 Annual Costs Debt Remaining Interest Accrued $25,920 $80,000 $16,640 After 1 year of Debt Servicing business now owes $132,552 After 1 year of Commercial Debt Settlement business now owes $96,640 Source: SettleSource, Inc. *Costs and estimates are based on average client debt loads and minimum monthly deposit requirements. Case references unsecured and interest bearing bank debts averaging annual decreases/increases at APR of approximately 20%+-. Savings and costs are based on a 50% savings. Results, actual savings and timeframes may vary.
  32. 32. Getting started on a Step 1. Begin by evaluating your financial recovery plan stability. Ask if any of the 5 reasons for failure apply We have provided some Step 2. Evaluate your P&L to determine if current and relevant any of the methods provided would help information regarding avail time or cash to help the business pitfalls and solutions to Step 3. Evaluate your day to day operations, businesses facing seek input and support from your increased financial employees on ways and plans to pressures. improve. This affects them too, so make sure they support your efforts and aid in If you are serious about recovery gaining ground for Step 4. Begin to take steps determined to recovery, then we suggest negotiate for cash flow improvements you begin with these first and gain favorable terms with creditors, few steps. vendors/suppliers, landlords, etc. Step 5. Stay positive! You are now on your way to financial recovery, manage it, Source: www.settlesource.com work it and remember to maximize the 3 R’s!!
  33. 33. Contact us If you have additional questions or wish to learn more about how we can help you construct a plan to help your business please contact: For help with Commercial Debt Settlement: Christine Janklow, President SettleSource P: 888.676.5606 x 101 Email chris@settlesource.com www.settlesource.com For other articles and resources about financial recovery in hospitality: Sarah Lockyer, Finance Editor Nations Restaurant News Email: slockyer@nrn.com www.nrn.com For help with strategic development and implementation: Jon Jameson, Founding Partner Bellwether Food Group, Inc. P: 843.422.4285 Email: info@bellwetherfoodgroup.com www.bellwetherfoodgroup.com
  34. 34. Question & Answer Please type your questions in the Q&A area in the lower right corner
  35. 35. Thank you for your continued support of the National Restaurant Association. View this and other recorded webinars on the web at www.restaurant.org/webinars

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