LEAD STORY
Surviving a Struggling Economy
The signs are everywhere. Just take your pick. If you are a by-the-numbers analytical type, take a look at Rhode Island’s monthly employment numbers, commercial and residential real estate prices, or municipal tax rates. If you are a visual type, check out the empty storefronts at the next strip mall you pass by.
So what is a business to do?
It is a simple question. And the answers to it, though grounded in common sense, are not always easy.
Peter C. Dorsey, Jr. is president of the Business Development Company of Rhode Island. Established by legislative charter in 1953, the BDC provides financing to companies whose funding requirements exceed available bank debt and equity.
Step one for any company, said Dorsey, is to establish profitability, because as you continue to lose money you are digging yourself into a deeper hole,” he said.
With a half-century track record, the BDC has seen it all. Over the years, the lender has played an instrumental role in helping hundreds of companies become strong competitors, particularly manufacturers, distributors, and a wide range of service providers, including software, medical technology companies, and high tech firms. The BDC is often recommended to companies by accountants, lawyers, and other business advisors.
The challenging thing about operating in such a distressed economy, said Dorsey, is that good companies with profitable histories are being forced to make difficult decisions and reinvent themselves.
“A lot of real good, well run companies have suffered losses,” he said. “Unfortunately, a lot of people get entrenched in their old model. They have to get their arms around the opportunities and sacrifices they have to manage.”
Those sacrifices, said Dorsey, sometimes mean layoffs. It is a difficult step to take. He points out that if a company has 40 employees, the decision to cut five jobs is in fact painful.
“It’s tough because for those five people, it is their livelihood,” he said." But it just might be the only way to save the remaining 35 jobs.”
Leonard Lardaro, a professor of economics at the University of Rhode Island, has chartered the state’s economic health closely for the past decade with his Current Conditions Index. He agrees that maintaining profitability is imperative for any company. He also believes that the status quo rarely works.
“You have to redefine your niche,” said Lardaro. “You have to get pricing power. If you stand still the world may pass you by. And once that happens, you are in a precarious situation. You have to look at what your niche is now and find ways to enhance it. You have to control costs.”
Like Lardaro, David J. Lucier, a principal of LUCIER CPA, Inc. and a member of the RISCPA’s Board of Directors, tells his clients to be proactive and that they need to be thinking about “right-sizing, not downsizing.” Lucier has served as a CPA and business advisor to hundreds of start-ups and emerging companies over the past 30 years and gives seminars all over the country. His mantra to anyone who listens is that they need to follow a “PIE” approach. That is, they need to become “progressive, innovative entrepreneurs.”
“You cannot be complacent,” said Lucier. “You have to continuously re-engineer your business based on the current and future economic conditions. And they will change quickly.”
Lucier believes that in the grips of this suffocating economy, most businesses are taking one of three approaches. Some, he said, are simply moving away. Others are “riding the wave down into bankruptcy.” But others, he said, do see the light. They are following his PIE formula.
“They are finding new niches,” he said. “They are stealing customers from competitors who are sleeping.”
Maybe a business owner doesn’t want to move his or her business out of state, but opening a satellite office outside of Rhode Island may make sense, said Lucier. With a two-hour flight to growth areas such as Raleigh/Durham, customers can be sought out elsewhere and the work can still be done here, he said.
“You have to think differently,” he said. “You can’t just think Rhode Island.”
At the BDC, a poor economy means a wide range of companies looking for ways to survive. Simply put, Dorsey sees the BDC’s work as that of a problem solver.
“Banks represent a company’s preferred funding source, and we enjoy a productive working relationship with them,” he said. “However, banks are regulated and most comfortable dealing with square and round pegs. Our first meeting with a prospective borrower starts with a block of wood that we can sculpt to match what the individual solution requires.”
And that’s the key, he said. Solutions must be tailored to individual companies.
“You have to understand a situation before starting a dialog about how much a company needs and how it is best structured,” he said.
That dialog typically includes the CPA firm working with a prospective borrower. At the BDC, CPA’s assisting their clients represent a primary referral source. The common goal for all involved, is finding the best way to maximize an infusion of capital. But before that capital is even offered, the company – even in tough times – must demonstrate success.
“The business model has to be working for a company to take on new money,” said Dorsey.
According to Dorsey, the biggest impediments to accessing bank capital are tight cash flow, high leverage and inadequate collateral.
“Banks generally welcome us working with a cash challenged borrower because we are typically behind them on the collateral and they can shut off our payments to conserve if a company’s flow is below expectations. Because of those two factors a bank will include our balance below the liability line in a debt/equity leverage test.”
The way Dorsey sees it, everyone wins when a struggling company finds its way.
“The companies that we support, support other companies,” said Dorsey.
The bottom line, according to the experts, is that things will not turn around on their own. Surviving in such an economy requires making tough decisions – and doing things differently.
“Do not necessarily do things the way you have done them for the past 10 or 15 years,” said Lardaro. “You adapt. You rethink things.”
