September 26, 2008

Dealing with the financial meltdown - tips for businesses

With the global financial markets in disarray, lots of people are worried about their money.

In times like these, business owners need to be just as vigilant about their business accounts as they hopefully are about their personal accounts.

In the United States, for instance, there has been a lot of concern that the market for money market funds could be "the next" to run into problems as many institutional investors have demanded redemptions.

Here are some tips for business banking in today's environment:

  • Find out what insurance, if any, your bank and financial accounts are covered by. In the United States, for instance, checking and savings accounts for corporations and partnerships receive $100,000 in FDIC coverage. If your company has more than the insured amount in a single account, spreading it across multiple accounts (and at different institutions) would be a wise move to ensure maximum protection.
  • Preserve capital and liquidity. Many companies were hit earlier in the year by the failure of auctions for auction rate securities (ARS). Most of these companies had been told that ARS were highly liquid and because they offered higher interest rates than mutual funds were very appealing. But the liquidity was an illusion and a number of startups reportedly ran into cashflow problems when they couldn't pull money out of their ARS.

    The lesson - if you have money that is going to be needed for accounts payable, etc., you might want to reconsider whether or not it should be invested. In my opinion, risking principal and/or liquidity for interest is not smart. It's far better to be in cash (and have some protections) than to put your principal at risk.

    For those business owners who do decide to keep some capital in interest-bearing instruments, know what you're investing in. Any instrument offering higher-than-average interest rates should raise huge red flags.
  • Focus on fundamentals. In tough times, it's easy for businesses to fall upon hard times, go into debt and even to fail completely. Today, even strong businesses are finding it more difficult to borrow money from banks that just don't have a lot of capital to lend.

    That's why it's doubly important to ensure that your balance sheet stays solid - you have a better chance of making it through the downturn and at the same time maximize whatever potential exists to obtain financing from lenders if absolutely needed. And when we emerge from the downturn, you'll have a business on good footing to take advantage of the recovery.
  • Stay informed. Keep current on what's happening in the financial markets, monitor the news about the financial institutions you deal with and don't hesitate to ask questions.
  • Don't panic. It's easy to become overcome by fear in a market like this. When making decisions, however, be sure to stay rational and check your emotions at the door. This will help you make smart financial decisions.

Volatile markets are never fun and the current global crisis is certainly the worst in decades. But crises like this give business owners a good reason to go back to basics and rediscover some of the good practices that are often lost when times are a little too good.

Source: Dealing with the financial meltdown - tips for businesses

No comments: