First, the good news: for the first time since the recession began, more small business owners say they are planning to hire over the next six months. Now, the not-so-good news: those same small business owners also say they are now more concerned about their cash flow than before the recession began. In other words, companies might not be able to follow through on those hiring plans unless they can sort out their cash flow problems. These results, which come from the Small Business Monitor survey released this week by American Express OPEN, present an interesting wrinkle for those waiting on a surge in hiring (see the OPEN Forum Small Business Monitor chart).
“We’ve seen companies maintain their cash positions over the past few years mainly by streamlining their costs,” says Mike Lubansky, a senior analyst with SageWorks, a Raleigh, North Carolina-based provider of financial analysis for privately-held companies. “Now companies find themselves in a quandary where they might need to add to payroll to generate a boost in their revenues, but, at the same time, they’re skittish about hiring because of the short-term hit they’d take to their cash flow. They’re reluctant to bring anyone while there is still so much uncertainty.”
Consider the example of Leslie Singer, CEO of HS Dominion a creative branding agency based in New York City. Singer says business is booming, especially compared to the past two years, which has led her to think about adding to her staff of five full-time employees. But, after a client’s project got put on hold, Singer decided it was too risky to bring on any additional full-time employees. “We are now on the right track and business couldn't be better, but our financial resources have not caught up,” she says, adding that another client puts pressure on her cash flow by not paying for 90 days. “So instead of hiring full-timers, which we need to do, we are still using freelance staff until we can get ahead of it all.”
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Jim Smith, who owns Enterprise Management Group, a consulting firm in Sammamish, Washington, is also relying on contract employees rather than full-timers to meet the upswing he’s seeing in his business. “The economy is like a roller coaster where having full-time employees can be the kiss of death for a small business,” he says, noting that it hasn’t been uncommon for him to pay a team of 12 people upwards of $500,000 in out of pocket compensation for client work while he waited up to 120 days for the client to pay him for their work. “When the economy turns around, and we then have to grow, the delay between hiring someone and receiving payments is scary, to say the least.” The rub for Smith was that it became a challenge for him to keep a roster of contractors he could tap into when he did land an engagement. “It was like I was always starting over again when I have to train someone new,” he says. His solution has been to begin charging his clients up front for his services as a way to flatten out his cash flow.
The issue for many small business owners is that they’re still having trouble getting credit from banks to help make up for their shortfalls in cash flow. Case in point: Lynne Lambert, the founder of NYC Subway Line, which sells a line of t-shirts and accessories under license from the MTA, says that her business is booming this year, thanks to new customers carrying her line such as Toys R Us Times Square, FAO Schwarz and Hudson News. They are also working with Apple on creating a line of subway-themed laptop cases. But Lambert, who sources products both domestically and from China and South America, has felt a cash flow pinch as her international vendors have begun asking for up-front payments in lieu of deposits. But when Lambert went to her bank to increase her line of credit, to cover her bases in case her customers increased their orders, the bank was only willing to give her 40 percent of what she was asking for. “My husband and I have been banking with them for decades for both the business and our personal finances,” she says. “We have great credit and have never had problems borrowing before. To make it worse, it took their underwriters nine weeks to get back to us with the news.”
While Lambert says she has enough cash to meet her current demands, her inability to borrow has short-circuited her plans to hire more employees—something she says the business, which has two full-time staff and one part-timer, needs. “Sure we’d love to hire another full-time person, but because of the limits on our cash flow and the inability to borrow, it’s just not in the cards,” she says.