March 10, 2009 in Smart Money

Managing a small business in a recession

It goes without saying that a severe recession means rough sledding for businesses. But small businesses can escape some of the woes plaguing their bigger brethren, and downturns provide opportunities as well as hardship.

“While it is true generally that recessions are bad for business, big trees make the most noise when they fall in the forest,” says Adrienne Becker, chief executive of Ideastox, a Web site where people can exchange business ideas.

“Small, nimbler new enterprises are much better positioned to merge, take advantage of obstacles and see opportunities. Historically, tough times have spawned the next generation of great companies.”

“Building revenue is art, and cutting expenses is mechanics.”

One point that is paramount during a recession is to make sure you are in a business to which you’re 100 percent committed. “Pursue your passion,” says Rich Sloan, founder of StartUpNation, a Web site offering help for new enterprises.

“Business is tougher than ever during a recession. You have to fight for orders and overcome challenges. If you’re passionate, you’re contagious. People want to work with you, buy from you, work for you and invest in you.”

Beyond passion, experts have a bevy of ideas on how small businesses can cope with a recession. Eric Siegel, an instructor at the University of Pennsylvania’s Wharton entrepreneurship program, views strategy in terms of the business owner’s income statement and balance sheet.

Art and mechanics

As for the income statement, “there’s art and mechanics,” he says. “Building revenue is art, and cutting expenses is mechanics.”

Mechanics, of course, represent the easiest place to start. Slash costs viciously, experts agree.

“Examine your financials,” Sloan says. “I do this every week in my business. Determine which things have a fixed cost and those that are variable. Anytime it’s variable spending, you should be doing it only when it’s making you money.”

For example, instead of bulking up on staff, consider outsourcing and contract labor. And look at different ways of operating your business.

“I have a client with a production line that’s only 30 percent utilized now,” Siegel says. “He’s friendly with two other companies that aren’t competitors. Each was renting their own space, paying their own staff, etc. Now they’re going to share the production line and will all enjoy significant savings.”

Small businesses can take advantage of the deflationary environment as well. “When demand slackens, your suppliers are hurting too,” says Scott Shane, professor of entrepreneurial studies at Case Western University. “So you can strike a better deal to cut your costs by paying your suppliers less or hiring better people at a lower cost.”

And cutting costs quickly is vastly preferable to doing so slowly. “I have a client whose uncle is on the payroll and is close to retirement age,” Siegel says. “He’s not productive. But my client doesn’t want to tell his uncle not to come to work tomorrow, even though he’ll clearly get to that point.” The sooner you make the tough decisions, the bigger the payoff.

Bartering to curb spending

On another front, small businesses are turning increasingly to barter transactions to curb their spending. “It’s a great way to conserve cash,” says Ideastox’ Becker.

And it provides benefits even outside of recession. “More companies realize success is difficult to achieve in isolation,” she says. “Building alliances with companies which may be competitors through creative means such as barter becomes an investment in your future.”

Startups can minimize costs by finding the lowest-price vendors for expenses such as a logo and business cards, phone service and setting up a Web site.

“That’s a strategy you can pursue to keep your costs in the hundreds of dollars as you put up your shingle,” Sloan says. His Web site, startupnation.com, has a section to guide new businesses to the cheapest vendors for these services.

One area where you shouldn’t trim expenses is marketing, says George Cloutier, chief executive of consulting firm American Management Services in Orlando, Fla. “The tendency during tough economic times is to cut marketing,” he notes.

“But increasing spending in that area or just changing employees’ roles to focus more on marketing can pay big dividends in the form of stronger sales.”

To be sure, it may be possible to ramp up marketing efforts without doling out more money. “Thanks to the revolution with the Internet, there is an abundance of new ways to get your product into the marketplace without having to do the old-school media buy,” Becker says.

Acquiring customers

In terms of increasing revenue, the artistic side of the income statement, as Siegel puts it, he and others have several suggestions. “In this climate, because big businesses are suffering, their quality might slip,” he says. “There may be an opportunity to acquire customers unhappy with their existing providers.”

Building loyalty among your own customers is crucial during a recession. “There are things that may not make you money immediately, but the economy will be more robust one day,” Sloan says. “The more you ingratiate yourself with customers now, when they start spending freely, it will work out well for you.”

He recommends providing freebies. “For example, if you’re a consulting firm and have open hours, you may as well give them away. Customers will love you.”

Choosing the right products to sell also can make a difference. That’s because consumers often substitute a cheaper product for a more expensive one during recessions.

“For instance, people might cut back the number of steak dinners that they eat out,” Shane says. “But because they still want to treat themselves, they increase their purchase of cheaper foods, like pasta.”

One way to keep customers satisfied is approaching them after a sale for feedback. “See if they have any suggestions,” says Ryan Peddycord, president of Resource Nation, a small business consulting firm in San Diego. “That opens more opportunities for sales to that client or referrals to new ones. People like to be heard, and not just in automated surveys.”

New attitudes

As for the balance sheet, Siegel says the financial crisis has created new attitudes just like the Great Depression did. “Companies will become more cautious of leverage,” he points out.

“Look at your capital base in relation to the economy. We’re seeing with big companies that they don’t have the capital to make it through a difficult situation. The first basic test you have to pass is will you remain viable?”

Experts point to several ways of raising capital. “The credit crisis is a crisis in the debt markets,” Shane noted. “Sources of equity capital — friends, family, business angels, strategic partners and venture capitalists — are in better shape.”

If your business has valuable assets, you can create capital by selling them. “You might find that you don’t need to borrow additional money for growth if you, say, sell your trucks and lease them back,” Shane says.

If you do need to borrow money, community banks may be a preferred source of loans. Since many of them didn’t suffer from the subprime mortgage crisis, they often are more willing to lend than their bigger competitors.

If you’re having trouble borrowing from a bank, you can try a more creative solution. “The best source of financing when banks dry up is accounts payable,” Cloutier says. “You can get extra money by taking longer payment terms. So if you owe vendors $50,000, and you can expand that to $70,000, you just got a free $20,000 loan.”