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Small Business:
Smart Moves For an
Economic Slowdown

The U.S. economy has got the jitters and the stock market is shedding dollars faster than a man who has stopped using Rogaine sheds hair. Alan Greenspan's staying up at night worrying about how to fine tune the overall economy. I have news for you, Alan. At this point, fine-tuning is rearranging deck chairs on the Titanic instead of the assured leadership we'd come to expect of you. As captain of this economy, we trust you to make sure there are enough lifeboats before the ship launches.

Your economic theory is probably still close to target but you could stand an introductory course in Behavioral Psychology. Sure, you had a great ride managing a historically long expansion, but it is tough to stuff the economic genie back into the bottle when the audience has lost faith in the magician.

Still, there is money to be made by small businesses, even in a "down" economy. Here's the ABC small biz guide to riding out, and even profiting from, a business downturn.

Evaluate Your Business

Now is the time to review the way you are currently running your business. Whether your business is doing well or needs some improvement, the current economy means that you should look at your company the same way that you would if you were buying a competitor. What can you do better, more efficiently or cheaper?

As consultants, we usually start by taking a look at your cash flow. (Kris has written a basic how-to article on cash flow analysis that you will also find here in the "Money Matters" section of the website.) The idea behind looking at your cash flow and cash position is simple: if you run out of money, your business dies.

One thing we regularly recommend to our clients is to start every morning knowing by knowing exactly how much cash you've got in the bank. Check it out yourself and write it down, or (for bigger companies) have your in-house bookkeeper or accountant update you. This little habit can alert you to changing conditions and give you time to react effectively.

Making Decisions

We make our decisions based on what it will cost us if things don't work out. Usually, we will evaluate big purchases that we buy only occasionally, such as a car, very carefully. It costs a lot, and if we make the wrong decision it can be difficult and expensive to fix it - or you may just elect to put up with problems for a long time. Buying something like shampoo, with dozens of varieties available at a typical grocery store, may get your deep attention the first time you buy or if something changes. Other than that, you are likely to consider previous experience and price briefly when making repeat purchases. You would be very hard pressed to get through the day if you fully evaluated everything you do before making a decision.

We do that with our businesses. Finding a place of business, suppliers, contractors and employees deserves careful attention. But when you unlock the doors and turn on the lights today, you probably don't think about any of these things as requiring evaluations. In a down market, though, it is time to reexamine your alternatives.

Location, Location, Location

Real Estate's most important rule is there for a reason: it works! The best locations put you close to your customers, especially if you are a retail business. The location you actually get is based on a number of factors: cost, availability, zoning laws, available services among them. If you have been in your location for a while, it's time to look at it and see whether it is meeting your needs and those of your customers.

• Is it too big? You might want to consider leasing or subleasing some of that space!
• Is it too small? Now's a good time to get deals on additional space. Be careful though, only go for what you need and count only on the solid ongoing business that you have.
• Does it have the right services? These days, basic service doesn't just include water, electricity and sewer - if you do any business on the internet you want a reliable and fast connection.
• Amenities: does it have enough parking? Or anything else that's nice but not strictly necessary? You don't have to have an on-site health club with a massage therapist on call but there may be some things that would help you, your staff and your customers work better and more happily.
• What's the price? With companies going out of business or shrinking their need for space, you might be able to get a better deal than you did 2 years ago.

Of course, if it'll be a while before your lease might be up or you own the building, it may not make sense to move right now. Still, evaluate what you can get and what it will cost you.

Remember, there are two ways to make more money in business. One is to sell more products or services and the second is to reduce your costs. While everyone is busy pulling back or holding on, it may make sense for you to find a location that you know will make more sales - if the price is right.

Customers

Evaluate your existing customer list.

• If your best customer cuts back on orders or stops, how will you react?
• Who is making money for you?
• Which customers are actually costing you more money than you charge them? Are they likely to continue being too costly to serve? Do not look just at what you sell them and how much the materials costs are - evaluate how much time and additional service they require. Then decide, is the problem with you or with them? If it's with you; fix it. If it's with them; fire them!

The changing economy is going to be putting pressure on your good customers as well as on you. By working together, you can provide them better value and better prices.

You may have done very well over the past few years by "up-selling" your customers from basic products or services to fancier ones. Now is the time to find out which of those upgraded services they really need and to provide them with value priced services that will enable you - and them-to succeed. You may have noticed that McDonald's has recently offered a 79 and 99 cent menu to compete with Wendy's popular 99 cent menu. That's a good strategy for tough times: keep the customers coming in, keep decent profit margins but allow them to make choices among a limited menu that you have better cost control on than with your higher priced items.

Ask your customers what they are dealing with and listen to their responses. Work with them to see if you can cut their costs while maintaining decent profits. If you can get them to commit to providing you a greater share of their business, you will both benefit.

Suppliers

If you can get your customers to commit to buying more from you, you may be able to arrange bigger volume discounts from your suppliers. The same logic applies - if you have been using multiple sources, now is the time to look for suppliers who will cut you the best deal on quality, price and availability.

Quality is always a funny thing: you don't want to pay for too much of it. There are cables for wealthy music lovers that cost thousands of dollars, but you can probably find something that will satisfy your needs for a maximum of a couple hundred bucks. If you're really cost sensitive, you can cruise on down to Radio Shack.

Since you don't want to pay too much for quality, your customers don't either. They want the best price and/or service they can get for a specific level of quality. Find out what each of your best customers really need. It's a good place to save them some bucks while continuing to meet your need for profit.

Another place you can save your cash flow is by timing deliveries when you need them. A six month supply of product is probably at least 5 months too long right now unless it is a really, really terrific deal. Why? You don't want to tie up that much of your cash in inventory even if the supplier gives you 6 months to pay for it. Inventory can go obsolete or be damaged, plus it's expensive to keep in stock.

One nice thing about information technology is the ability to get what you need from your supplier, fast. It's entirely possible to offer your customers next day delivery by drop-shipping from your supplier without ever having to handle product yourself.

When talking with your suppliers, pay careful attention to discounts that they offer for volume purchase. Look for agreements where you get a volume discount dated back to your first order of a time period when you reach a total order quantity.

Your Product or Service

Look at what you do: what can you do to cut costs but still provide the quality your customers need? It may actually be something that cuts cost and improves quality. Perhaps you can make your product with fewer pieces. That's been happening with products like computer printers - they now have far fewer moving parts than early printers. This has the benefit of reduced cost and greater reliability. Can you take fewer steps in manufacturing or shipping? Can you have fewer, better contacts with your customers? Let the computers handle routine ordering and save your people for finding new clients, expanding the business of existing clients and solving problems.

Review Your Regular Bills

These include regular monthly bills such as utilities and promotional activities. It also includes periodic bills like your insurance. Do you have alternatives that will provide reliable service at a better price than what you are currently paying? Can you cut utilization of some utilities or services, for example by turning down the heat or using electricity at non-peak times? Cut the phone bill?

Buy or Lease?

You may be used to buying equipment when your business needs it. Over the long run, it may be less expensive than leasing. However, leasing is more immediately tax deductible than purchase and it saves you cash now. Do not, however, lease equipment just because you can. Be as responsible on leasing choices as you'd be if you had to lay down a fat stack of $20 bills for the item.

Your Employees

Update your employee evaluations. Who is really good at their work? Who needs improvement? Who fits in well with the rest of the team? You may not always be comfortable telling people when they need improvement but now it's important for your entire team to be producing. Give constructive criticism and set goals that they can reach. If they can't reach them, let them go.

When the economy is as tight as it currently is, be careful about additional hiring. Your first consideration should be expanding the hours of your existing employees if you have what might be a temporary surge in demand. On the flip side, if you need to cut work, unless you have an obvious candidate who is not pulling their weight, you may want to ask if any of your employees would like reduced hours. Some of them might welcome the opportunity to cut back for personal reasons. You can keep good people that know your business and they may be available for more hours when you need them.

Make Your Banker Your Friend

It's time to be "teacher's pet." Find a banker who is empowered to make at least recommendations, if not decisions. Put him or her on your team by keeping them in touch with how your business is doing. Develop a casual friendship, if possible. Make sure that they know darn well your ability to execute, your level of reliability and what your business does. Find out what the bank officer can offer you - besides money, a lot of them are smart and know potential investors, suppliers and customers for your business. A friendly banker can help you over the tough spots with resources and good advice.

Manage Your Trade Credit

If you bill your accounts after shipping them products or providing them services, you're probably familiar with the phrase "30 days same as cash." In a tough economy, you're going to find your customers trying 60 or 90 or 120 days "same as cash." If you've got a big company with a good credit rating pulling that, there are work arounds so that you can get paid more quickly.

• Keep an eye on their credit rating. That's what Dun & Bradstreet is for! http://www.dnb.com/
• If it degrades, consider tightening your terms or pulling their trade credit privileges.
• Reach an understanding with your customer. Don't let it slide because they can get you into serious trouble. If they need more trade credit, somebody's got to pay for it.

Keep Financial Tabs on Your Customers And Your Suppliers

• Keep an eye on your customers' credit ratings.
• If they seem to be sliding out how long before they pay you, you may want to purchase accounts receivable insurance (see our article on that updated this issue) to keep your cash flow steady.
• Keep track of your suppliers as well-if they can't provide what you need, or suddenly go out of business, you may have a tough time meeting your customers' needs.

Sell More!

• Look for other customers and offer them deals that they won't want to refuse. The efforts you have gone to for your customers will also pay off with your competitors' customers.
• Work with your banker or other sources of credit, like GE Capital, to see if you can get credit extended to your customers.
• Build partnerships that you, your suppliers and your customers can rely on.
• Actively look for new opportunities to offer your customers good deals.
• Get creative. Look for people who need your services or products and find out what they need.
• Sometimes it's easier to work a three way deal than to make a direct sale.

Conclusion

When the going gets tough, the tough get stronger. A sluggish or down economy can force you to make changes or you can move as quickly as you recognize problems and set your business up for success even when similar businesses are in trouble. This will pay dividends. Your profitability will soar when the economy improves because of the good work you've done in reducing costs and providing value for your customers.

-Cindy Nemeth-Johannes