How to
Successfully Navigate Your Business through an Economic Downturn
by: Terry H Hill
An economic downturn is a phase of the business
cycle in which the economy as a whole is in decline.This phase basically
marks the end of the period of growth in the business cycle. Economic
downturns are characterized by decreased levels of consumer purchases
(especially of durable goods) and, subsequently, reduced levels
of production by businesses.
While economic downturns are admittedly difficult, and are formidable
obstacles to small businesses that are trying to survive and grow,
an economic downturn can open up opportunities. A well-managed company
can realize the opportunity to gain market share by taking customers
away from their competitors. Resourceful entrepreneurs capture the
available opportunities, from an economic downturn, by developing
alternate methods of doing business that were never implemented
during a prior growth period.
The challenge of successfully navigating your business through an
economic downturn lies in the realignment of your business with
current economic realities. Specifically, you, as the business owner,
need to renew a focus on your core clients/customers, reduce your
operating expenses, conserve cash, and manage more proactively,
rather than reactively, is paramount.
Here are best practices that will help you to successfully navigate
your business through an economic downturn:
Goals:
The primary goal of any business owner is to survive the current
economic downturn and to develop a leaner, more cost-effective and
more efficient operation. The secondary goal is to grow the business
even during this current economic downturn.
Objectives:
• Conserve cash.
• Protect assets.
• Reduce costs.
• Improve efficiencies.
• Grow customer base.
Required Action:
• Do not panic… History shows that economic downturns
do not last forever. Remain calm and act in a rational manner as
you refocus your attention on resizing your company to the current
economic conditions.
• Focus on what YOU can control… Don’t let the
media's rhetoric concerning recessions and economic slowdown deter
you from achieving business success. It´s a trap! Why? Because
the condition of the economy is beyond your control. Surviving economic
downturns requires a focus on what you can control, i.e. your relevant
business activities.
• Communicate, communicate, and communicate! Beware of the
pitfall of trying to do too much on your own. It is a difficult
task indeed to survive and to grow your business solely with your
own efforts. Solicit ideas and seek the help of other people (your
employees, suppliers, lenders, customers, and advisors). Communicate
honestly and consistently. Effective two-way communication is the
key.
• Negotiate, negotiate, and negotiate! The value of a strong
negotiation skill set cannot be overstated. Negotiating better deals
and contracts is an absolute must for realigning and resizing your
company to the current economic conditions. The key to success is
not only knowing how to develop a win-win approach in negotiations
with all parties, but also keeping in mind the fact that you want
a favorable outcome for yourself too.
Recommended Best Practice Activities:
The Nuts and Bolts… The following list of recommended best
practice activities is critical for your business' survival and
for its growth during an economic downturn. The actual financial
health of your particular business, at the outset of the economic
downturn, will dictate the priority and urgency of the implementation
of the following best practice activities.
1. Diligently monitor your cash flow: Forecast your cash flow monthly
to ensure that expenses and planned expenditures are in line with
accounts receivable. Include cash flow statements into your monthly
financial reporting. Project cash requirements three-to- six months
in advance. The key is to know how to monitor, protect, control,
and put cash to work.
2. Carefully convert your inventories: Convert excess, obsolete,
and slow-moving inventory items into cash. Consider returning excess
and slow-moving items back to the suppliers. Close-out or inventory
reduction sales work well to resize your inventory. Also, consider
narrowing your product offerings. Well-timed order placement helps
to reduce excess inventory levels and occasional material shortages.
The key is to reduce the amount of your inventory without losing
sales.
3. Timely collection of your accounts receivable: This asset should
be converted to cash as quickly as possible. Offer prompt payment
discounts to encourage timely payments. Make changes in the terms
of sale for slow paying customers (i.e. changing net 30 day terms
to COD). Invoicing is an important part of your cash flow management.
The first rule of invoicing is to do it as soon as possible after
products are shipped and/or after services are delivered. Place
an emphasis on reducing billing errors. Most customers delay payments
because an invoice had errors, and therefore, will not pay until
they receive a corrected copy. Email or fax your invoices to save
on mailing time. Post the payments that you have received and make
deposits more frequently. The key is to develop an efficient collection
system that generates timely payments and one that gives you advance
warning of problems.
4. Re-focus your attention on your existing clients/customers: Make
customer satisfaction your priority. A regular review of your customers'
buying history and frequency of purchases can reveal some interesting
facts about your customers' buying habits. Consider signing long-term
contracts with your core clients/customers which will add to your
security. Offer a discount for upfront cash payments. The key is
to do what it takes to keep your current customers loyal.
5. Re-negotiate with your suppliers, lenders, and landlord:
i) Suppliers: Always keep your negotiations on the level of need,
saying that your company has reviewed its cost structure and has
determined that it needs to lower supplier costs. . Tell the supplier
that you value the relationship you have developed, but that you
need to receive a cost reduction immediately. Ask your supplier
for a lower material price, a longer payment cycle, and the elimination
of finance charges. Also, see if you can buy material from them
on a consignment basis. In return for their price concessions, be
willing to agree to a long-term contract. Explore the idea of bartering
as a form of payment.
ii) Lenders: Everything in business finance is negotiable and your
relationship with a bank is no exception. The first step to successful
renegotiations is to convince your lenders that you can ultimately
pay off the renegotiated loan. You must point out to your lenders
why it would be in their best interest to agree to a new arrangement.
Showing them your business plan and your action plan that includes
your cost-savings initiatives, along with "the how" and
"the when" of the implementation of your plan is the best
way to achieve this goal. Explain to them that you will need their
cooperation to insure that you can survive, as well as, grow your
business during the economic downturn. Negotiated items include:
the rate of interest, the required security to cover the loan, and
the beginning date for repayment. A beginning date for repayment
could be immediate, within several months or as long as a year.
The key is to realize that your lender will work with you, but that
frequent and continual communications with them is critical.
iii) Landlord: Meet with your landlord. Explain your need to have
them extend the term of your lease at a reduced cost. Make sure
you have a clause in the lease agreement that entitles you to have
the right to sublet any or all of the leased space.
6. Re-evaluate your staffing requirements: This is a very critical
area. Salaries/wages are a major expense of doing business. Therefore,
any reduction in the hours worked through work schedule changes,
short-term layoffs or permanent layoffs has an immediate cost saving
benefit. Most companies ramped up hiring new employees in the good
times, only to find that they are currently overstaffed due to slow
sales during the economic downturn. In terms of down-sizing your
staff, be very careful not to reduce your staff to a level that
forces you to skimp on customer service and quality. Consider the
use of part-timers or the current trend of outsourcing certain functions
to independent contractors.
7. Shop for better insurances rates: Get quotations from other insurance
agents for comparable coverage to determine whether or not your
present insurance carrier is competitive. Also, consider revising
your coverage to reduce premium costs. The key is to have the right
balance-to be adequately insured, but not under or over insured.
8. Re-evaluate your advertising: Contrary to the other cost-cutting
initiatives, evaluate the possibility of increasing your advertising
expenditures. This tactic realizes the advantage of the reduced
"noise" and congestion (fewer advertisers) in the marketplace.
The downturn period a great opportunity to increase brand awareness
and create additional demand for your product/service offerings.
9. Seek the help of outside advisors: The use of an advisory board
comprised of your CPA, attorney, and business consultant offers
you objectivity and provides you with professional advice and guidance.
Their collective experience in working with similar situations in
past economic downturns is invaluable.
10. Review your other expenses: Target an across-the-board cost-cutting
initiative of 10-15%. Attempt to eliminate unnecessary expenses.
Tightening your belt in order to weather the downturn makes practical,
financial sense.
Proactively managing your business through an economic downturn
is an enormous challenge and is critical for your survival. However,
through well-planned initiatives, an economic downturn can create
tremendous opportunity for your company to gain greater market share.
In order to take advantage of this growth opportunity, you must
act quickly to implement the above best business practices to continue
realigning and resizing your company to the current economic conditions.
Copyright © 2008 Terry H. Hill
About The Author
An author, speaker, and consultant, Terry H. Hill is the founder
and managing partner of Legacy Associates, Inc., a business consulting
and advisory services firm based in Sarasota, Florida. A veteran
chief executive, Terry works directly with business owners of privately
held companies on the issues and challenges that they face in each
stage of their business life cycle. Terry is the author of the business
desk-reference book, How to Jump Start Your Business. He hosts the
Business Insights from Legacy Blog at
http://blog.legacyai.com and writes a bi-monthly eNewsletter,
"Business Insights from Legacy eZine." |
