|
How to prepare for, and deal with, an economic
downturn
By Jenny
C. McCune Bankrate.com
 Just
a few months ago, American business was riding on the longest wave
of economic expansion since World War II. But now, with the smooth
sailing rapidly ending, most small companies are ill-prepared. Their
owners don't know how to ride out a bad economic storm because they've
never experienced a slowdown.
"It's been so good for so long, that people
don't realize that things go down as well as up," says Lynn Daniel,
president of the Daniel Group Ltd., a strategic planning consultancy
in Charlotte, N.C.
Here's how to batten down the hatches, whether
to deal with the overall slowing national economy or your own individual
sector's economic woes.
Preparing
Before the worst happens, get your business ship-shape. "Too many
businesses are living too close to the edge of their balance sheets,"
Daniel says. "They need to keep a strong balance sheet before bad
times come." Do that by keeping debt to a minimum and paring down
overhead. If your business can afford it, set up cash reserves,
the business equivalent of saving for a rainy day.
Maintain an attitude of urgency -- a scrappy
startup attitude will help you survive no matter what the economy
does. "Run your business like there's a bridge on fire," notes consultant
Daniel.
Small-business owners also need to continuously
scan the horizon for signs of a downturn. Don't rely on the government
to send up a flare.
"The federal government is unwilling to acknowledge
the beginning of a recession until six months into it. So in a typical
nine-month recession, it may be nearly over by the time the government
says we're in a recession," says John A. Pearce, professor of strategic
management and entrepreneurship at Villanova University in Villanova,
Pa.
According to Pearce, warning signs for stormy
economic weather include:
- Slowdown in inventory turns;
- Increased reluctance of customers to re-order;
- Cancellation or reduction of regular contracts;
and
- Increased rate of returns.
Surviving once it hits
Companies that best survive a downturn generally move quickly and
take decisive action to combat an economic downturn, says Pearce,
author of Formulation
and Implementation of Competitive Strategy. At the same
time that survivors are quick to act, they also keep in mind that
the downturn will end and take moves to ensure their future. For
example, while they may cut back on incidentals, they'll keep their
sales force intact.
Reducing expenses is generally the first move
that businesses make when faced with a slowdown. But companies have
to pick and choose what to cut. Smart small-business owners will
focus on what's expendable, what Pearce calls "costs behind the
scenes," such as delaying purchasing of new office furniture, speeding
up maintenance schedules of equipment to avoid having to replace
it, cutting back on nonessential travel, etc.
"It's like a family when Dad loses his job,"
Pearce says. "The family won't call Johnny back from college, but
it will cut back on going to the movies on Friday night."
At the same time companies need to trim expenses,
they should be looking for new markets or new customers to offset
any downturn in regular sales, Daniel of the Daniel Group says.
Indeed, companies that fare
best through hard times are those that are in a niche so small that
competition doesn't increase during a recession or because they
have a broad enough product offering that any economic maelstrom
in one sector will be offset by strong business in a different sector,
says Villanova's Pearce.
Pick your priorities
Also look at your customer base and prioritize.
Find out who are the "strong horses" that will lead you out of your
bad times, says Ray Silverstein of President's Resource Organization
in Chicago. Focus your efforts on the customers who will net you
the most profit. Consider offering them special incentives to buy
now.
Work with your banker, Silverstein advises.
Negotiate more credit if necessary to tide over your company. Convert
short-term into long-term debt so you'll have more time to pay it
off.
Keep morale up at your company. Whatever layoffs
are necessary, do them quickly. And try to do it all at once instead
of extending the pain through rounds of layoffs. Be honest with
your employees about the situation, but allay their fears. "If you
think that they don't know what's going on, you're the one that
doesn't know what's going on," Silverstein says. Also ask them for
advice on what to do. Very often employees can be creative about
cost-cutting and finding ways to reduce expenses.
The worst thing that a small business can do
is to ignore the warning signs that bad times are on the way. "I
call it the mañana theory," Silverstein says. "Business will
be better mañana, mañana, mañana. They get
behind the eight-ball that way."
Daniels of the Daniels Group recalls a customer
that got complacent: "They were at a comfortable business level.
They thought they didn't need to look for more markets. Now all
of a sudden they're facing some really dire consequences and don't
have many choices."
To keep your options and your company's doors
open during hard times, prepare now. Perhaps a downturn won't come
your way, but strengthening your balance sheet and keeping in fighting
trim is good for a business, come good times or bad.
Jenny C. McCune is a contributing
editor based in Montana
|
