Business - Dave Gallagher

POSTED: Sunday, Oct. 11, 2009

As economy struggles, liquidity important for business survival

As the economy continues to struggle, Tom Dorr has been focusing on one message to business owners who see him: Liquidity is your friend right now.

There's been a recent flurry of local business closures, which prompted me to check in with Dorr, who is the director at the Center for Economic Vitality (formerly the Small Business Development Center) in Bellingham. He's also noticed the rise in closures lately, and based on what he's hearing from current clients and other indicators, he's expecting a steady stream of business closures in the coming months.

Whenever he sits down with a business owner who is having trouble, the discussion tends to turn first to cash management. A business in trouble is struggling to find cash, and it's usually tied up in two things - inventory or accounts receivable.

When the economy is chugging along, a business buys product (or material to make the product), then sells it to someone who either pays up front or buys it on credit. When the economy slows down, the inventory isn't moving out as quickly and the customers, who are suddenly having their own liquidity problems, aren't as quick to pay the bill.

The problem is when the business doesn't quickly adjust to the market. When the cash is tied up in inventory or accounts receivable even a few weeks longer than normal, the company suddenly has trouble paying its own bills. In many cases, by the time Dorr meets with a client, things are in such bad shape that there is little left to do to save the business.

"I've had many people say, 'I wish I was in here six months ago,'" Dorr said. "Well, I wish they were, too. It's much easier to get a handle on things early on in the cycle."

Dorr said one of the deficiencies we have in our current economic structure is the lack of an early-warning system for small businesses. Large companies have to give the state notices whenever they plan major layoffs, and there are many red flags that go up when a financial institution is in trouble.

"I know there are confidentiality issues, but if the goal is to save businesses, we should have something in place so owners can get some assistance if they want it," Dorr said. "After all, it is much easier to save a business than to start a new one."

For now, it's up to the small-business owner to decide if they are getting in too deep. While there have been some signs of an economic recovery taking place, Dorr still expects it to be a bumpy road locally.

So far this year I've counted 68 Whatcom County storefronts that have closed (there were 83 I counted in 2008 and only 35 in 2007). To make it through the coming months, particularly the traditionally slow first quarter, businesses need to keep adjusting.

"Cash is the most important thing for a business right now," Dorr said. "It's still difficult to get financing, so the focus needs to be within the company."