Recession Session

Money Matters

During a recession, companies that fail to hang on to cash often don't survive. Those that do may live to see better times. Sound simple? It's not. For instance, entrepreneurs who hope to hang on to cash by delaying payments to suppliers and creditors are deluding themselves and may be making matters worse, according to Tom Kinnear, executive director of the Institute for Entrepreneurial Studies at the University of Michigan in Ann Arbor. If stretching out payments is the only way to get through, you're already in so much trouble that you should consider liquidating, Kinnear says. "We're talking about basically financing the company with short-term debt," he says. "And that always fails in the end."

Jan Lok agrees. "I don't extend any accounts payable," the 52-year-old founder of Marketing Resources says. "That just gives a false sense of security." If anything, Lok pays bills sooner so he can see the monthly net.

That doesn't mean you have to idly watch your cash evaporate. With interest rates low, now may be a good time to borrow or to refinance loans or mortgages to reduce payments. On the other hand, be wary of temporary low-cost financing. Hoffman, the 48-year-old president of Hoffman Corp., recalls taking out a floating-rate loan at 14 percent during the 1981-1982 recession. "We floated right into 22 percent," he says. "That was scary." The move almost cost him his company.

With rental rates low in many markets, you may also save money by renegotiating your lease or moving. Gauger is renewing his lease for five years at 50 percent less than it would have been a year ago, when the Bay area market was red hot. That's a significant long-term benefit, he notes. "The cost for rent is probably only No. 2 to employee payroll."

Whatever you do, don't overdo it. If a lease looks tempting or a loan looks like a bargain, ask yourself if you really need new quarters or more money. A loan officer recommended the floating-rate loan that almost sank Hoffman. "In recessionary times," he says, "you have to make sure someone else's sense of urgency isn't pushing you to make decisions you shouldn't."

Online Exclusive
  • Stay up on economic trends with the National Bureau of Economic Research, the private nonprofit organization that officially declares when the U.S. economy enters recession, at or by calling (617) 868-3900.
  • Irish business-planning software company Invest-Tech Ltd. has a concise roundup of tips for making cash-flow forecasts, managing working capital and other techniques crucial to managing money through a recession available free at its Web site at or e-mail

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This article was originally published in the March 2002 print edition of Entrepreneur with the headline: Recession Session.

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