Does it hurt yet? Has your business been feeling the pain from the soft economy? How did 2002 turn out for your business? What do you see ahead for this year? Most of our businesses have definitely experienced the crunch and the future may look a little better but is still uncertain.
Look at this sample of recent headlines in our own Southwest region:
• Daisytek's top two executives and 60% of the workforce leave.
• Unemployment swells to 6 percent. The nation's unemployment rate swelled to 6 percent in April, returning to an eight-year high as employers slashed payrolls even deeper. The ailing economy has lost a half million jobs in three months.
These layoffs and cutbacks profoundly affect all of us, even if these companies are not our direct customers. Our regional and even global economy is so tightly interdependent that bad things in one sector can domino into others. Small businesses, especially, that provide services or products to larger corporations can be very seriously impacted. So do we SINK OR SWIM? What should we be doing in this difficult environment?
My recommendations are simple—NOT EASY—but simple. The following six tips are grouped into two categories. First, you have to get your financial house in order. And second, you have to invest your time and resources wisely.
Getting Your Financial House in Order: Roly Poly Finances. Let’s talk about your financial picture. When things get tough and your business is under siege, you have to get defensive—financially. Just imagine your business becoming like a Roly Poly. This small, friendly little creature is covered with protective body armor. But unlike the “armored” turtle or armadillo, it can roll up into a tight little ball when it is threatened. I think this little isopod provides a perfect metaphor for the financial protection you need--financially secure enough to roll with the economic punches.
Tip #1: Know what your breakeven point is and where your money goes.
Do you actually know what your financial leverage looks like? What is your breakeven sales volume? Can you lower your fixed costs? When things are good, we can get into some spending habits that we should reexamine. Now is the time to carefully evaluate where your money goes and what you can live without.
A breakeven analysis will help you better understand your operating leverage and business risk profile. The higher the fixed costs, the more profit you can make on the upside. Unfortunately, though, high fixed costs increase your risk and can result in deeper losses on the down side.
Look for ways to lower your fixed costs. Evaluate internal staff functions and arrange for flexible staffing solutions wherever possible. Ask your employees if anyone would like to take some unpaid leave during the summer to spend more time with their families. In a tough business environment right now, so you may have to reduce or defer some of your own salary for a short time to ensure you have enough cash to support the rest of the business. Look very closely at any fixed costs for alternative approaches to improve your operating leverage.
Reduce expenses overall—even when it hurts. Look under every stone. (Get it?) Challenge your own “sacred cows”. Defer optional trips—use the phone instead. To really get after some of those personal paradigms, get your employees involved. Give them permission to challenge them! You will find some expenses that can be easily eliminated and then perhaps picked back up again three to four months later.
Tip #2: Watch your cash flow like a hawk.
In normal times “Cash is King”, but now more than ever, cash flow really matters. Take a hard look at your cash balances plus your cash resources—bank accounts, liquid investments, credit lines, investors, etc. and compare them to your monthly fixed costs. Consider how long you can stay in business with your current cash resources if your revenue were to take a nosedive. If you are in the three to six month zone, you are probably in reasonable condition. If you have less than three months of cash flow available, watch out!
If you are worried about your cash resources, consider where there might be any other sources of cash you could get your hands on. Are there any assets you could sell? Could you attract another investor? Remember, capitalism is survival of the fittest. If you are a survivor during this difficult economy, you should most likely be a real winner when the recovery occurs.
Tip #3: Lower your borrowing costs and arrange for working capital financing before you need it.
Financing costs can choke a business, and lack of cash flow can kill it. Ask yourself the following:
► Are you relying on expensive credit cards for any of your cash flow?
► How much long-term debt do you have in your business?
► Could you refinance or restructure your debt to free up cash flow and lower your cost of borrowing?
Interest rates are extremely attractive now, and if you could restructure any of your capital to free up cash—DO IT. A common oversight of small businesses is the lack of adequate capitalization and the productive use of financial resources. You control your capitalization and your cost of debt.
Do you have an adequate line of credit arranged with your bank? If you don’t yet have a line of credit in place with your bank, arrange for one sooner rather than later. A working capital line of credit provides an important cash cushion for a rainy day. It should not be viewed as a substitute for adequate invested capital, but it can smooth out the cash flow peaks and valleys when you need it.
Invest Your Time and Resources Wisely: Painting Rigs. When you know you’re financially secure—that comes first—I recommend that you seriously evaluate how you invest your time and other scarce resources during this period. My father worked in the oil fields for Gulf Oil Corporation over 40 years. (He spent many of those years in Kilgore, TX.) I remember him saying, “When you’re not drillin’ for oil, you need to be paint’n the rigs.”
I think that can be applied to businesses in a downturn. When business is good, there are a lot of important tasks that just don’t get the attention they deserve. When your business activities decline, you should have some extra time on your hands to devote to some of those important tasks. What “rigs” in your company need “painting”?
Tip #4: Re-examine your business strategy and marketing plan.
Do you have a strategic plan? Have you thought about creative ways to expand or focus your business for the future? Because weaker rivals may be more vulnerable now or other opportunities may exist, this is a great time to evaluate your business strategy and take advantage of unique situations that may be present. Better now even because of attractive interest rates to finance part of such a transaction. Look for possible joint ventures that could have beneficial long-term implications. Clarify what your long-term goal for the business really is. Employees place a high value on knowing what your aspirations are for the company.
Do you have a solid marketing plan? This is the time to refine your marketing objectives and rework marketing materials accordingly. Make sure you have a marketing plan that adequately leverages the ways in which your company is unique and has distinguished itself in the last few years. The plan should also realistically incorporate any recent changes in the market, your competition, and technology that affect your industry.
Take a look at your website. Have you been diligent in updating it with fresh new content? Does it need a design facelift? Is it working for your business the way you want it to? Many small companies neglect their marketing materials and even website once they finally have something that they like, and it’s finally done!
Tip #5: Increase your personal selling efforts.
As the head of the business, you are the company’s best salesperson. Even if you have a great sales team, make some sales calls yourself. Get out there spend time with your clients and potential clients. Find out what their biggest challenges are and look for ways you can help. These are valuable seeds planted for future harvesting. Some business owners find themselves so consumed with operating the business that they miss out on opportunities to get to know with their customers better.
This is also a great time to clean up your contact database. Any such data gets stale over time, and needs to be freshened up. A robust database and coordinated sales process can be powerful growth tools for the business.
Tip #6: Improve your operating efficiencies.
Any business can get into an operating rut. Often we rely on “if it ain’t broke, don’t fix it”. But there are probably many opportunities for you to improve your operating processes and maximize efficiency. Are you confident that you and all your employees are doing the right things right? This downturn should allow you to evaluate your work flow and identify areas where redundant activities are taking place. Many of these changes can be inexpensive and still produce significant productivity gains. And productivity equals profits.
Put together some “process innovation” teams to tackle the most challenging processes, especially those that have an impact on your customers. Make it a priority and create some accountability measures. This can produce some exciting changes that will benefit the company long-term.
Summary. All businesses, industries, and economies go through cycles. It’s painful, but natural. Like nature’s forest fires—devastating and destructive—but afterward the forest will grow back stronger and more resilient. This is what is in store for your business if you are one of the survivors. And there are many things you do control. While you can certainly put greater emphasis on sales and marketing, you also have to take control of your money situation. Become a Roly Poly. Make it a priority to move beyond just survival to the creation of a stronger and thriving business for the future.
