Tough times have returned to Pima County and to the nation! While local unemployment numbers do not fully tell that story, most businesses - especially those involved directly or indirectly in home building - know that the Tucson region is experiencing a slow down at best and a full-blown recession at worst. Therefore, small business owners and company managers should be asking themselves, "How do I know when and what to spend during these recessionary times?"

During slow economic periods, businesses typically experience lower sales revenues and a higher cost of sales due to severe competitive pressures. In order to successfully make it through this period, businesses need to also consider cutting overhead expenses in order to make a profit. The challenge is to recognize and be able to cut out "the fat" in your operation and protect "the bone and muscle." What lines of business, unproductive employees or activities can be scaled back in order to increase the bottom line? Funds that were going to be used for facility improvements or other feel-good asset acquisitions should be conserved in case conditions worsen. Business owners also need to discipline themselves to restrain non-essential and personal lifestyle expenses that drain business profits.

Cash is king, and your business should increase cash by accelerating your receipts and delaying payments till due without damaging relations with your vendors. If a business has accounts receivable, owners should be sure to bill promptly for services and products delivered and not to just bill on a certain day of the month. Generally, the sooner you send out a bill, the sooner you will get money back. Be sure to have a designated employee in the company monitor collection of receivables because, as they increase, those uncollected funds don’t benefit your bank account or your bottom line. Many customers believe that if you do not call them, then you really don’t need the money they owe you.

If your business carries inventory, you can increase cash by creatively managing down your inventory levels. Periodically, you should determine what inventory items are slow-moving and not generating sufficient cash. Does your vendor offer a program for buying back inventory, or at least crediting your account with unused inventory? If not, you should perhaps consider having a sale to convert these items into cash.

On the banking side, businesses should ensure their banker is fully informed as to what is happening in the company and what the operational results are. The company should produce financial statements monthly that include both the balance sheet and the income statement that include month-end and year-to-date results. Most importantly, financials are for the owner to study, not just something to give to the banker. Sometimes, business owners don’t want to share any bad news with their banker until it is absolutely necessary, and then the banker is surprised with the bad news. Unfortunately, the banker often surprises them back with a "No." Most, if not all, bankers do not want to make a loan to cover losses. However, if the business owner has a good plan with concrete decisions, it will help the loan application immensely.

Consequently, be sure to line up your back-up credit facility – whether it is a home equity line of credit, business line of credit or credit card – when the sun is shining. Otherwise, when it starts to rain, the banker will most likely not give you an umbrella.

It sounds crazy, but recessions can be good for business because, like a forest fire, they clear out the deadwood competition. For example, during the easy boom years of residential real estate sales in Pima County, there were a lot of individuals who really did not know - or care to learn - how to sell homes, and they became real estate agents. Sales closed easily because there were so many buyers. Today, those people are generally gone from the market with only the professionals remaining – those who work very hard to sell every listing.

So, business owners, tighten your belts and decide that you are going to double your efforts to make things work and to not let a recession get your business down!

Fred Dawson Jr. is executive vice president and chief credit officer for Commerce Bank of Arizona, a locally-owned community bank specializing in serving small to mid-size businesses in Tucson. He may be contacted at (520) 325-5200, or fdawson@commercebankaz.com.