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Preparing Small Business for Economic Hard Times

A Sign of Recession

A Sign of Recession

I hoped I wouldn’t have to write about coping with a recession.  But economic contractions are a fact of business life because.  Here’s my best business advice about preparing our small business for economic hard times.

Plan Now to Ignore Outdated Advice

To prepare this post I researched and reread a lot of the popular advice about coping with economic hard times. Some of it (like building cash and lowering fixed costs) is ageless. But many authors don’t seem to realize that the last five years have changed our business and regulatory environment. Here are four examples of obsolete and harmful advice.

Don’t make a priority of working with your bank loan officer. Ten years ago, your bank loan officer knew your business. The bank’s loan committee knew, trusted and relied on your loan officer’s judgement. Now, however, your credit line’s terms and conditions are often governed by the opinions of a risk management officer, and he doesn’t know your business at all. He relies on statistical models of the way “businesses like yours” “should perform”. Your hard work to recession-proof your business isn’t even considered, because the loan committee isn’t looking at your business; they’re looking at a set of averaged statistics for businesses in your NAIC.

Your bank loan officer probably won’t admit it, but his bank’s loan committee is, today, far more concerned about bank regulators’ calculations of loan portfolio risk. That’s why, during the last recession, many businesses were shocked to find that their solid financials, plentiful collateral and sterling repayment history didn’t insulate them from having their revolving credit lines cut by half, or even two thirds, without warning or explanation. Some even had their outstanding balances called. Here are three questions to ask your loan officers as a way of estimating their (remaining) influence:

  1. “How long have you been with your bank?” (Longer is better.)
  2. “What’s your personal lending limit?” (The higher the lending limit, the greater the chance that he still has some discretionary authority.)
  3. “Where do you go when you need higher lending authority?” (An absence of committees and statisticians is your clue.)

You probably like your loan officer. He may have spent years looking at the monthly financial statements your accountant submits as part of the terms of your credit agreement. But his influence isn’t what it was, and you’ll put your business at risk if you depend on him. Take a belt-and-suspenders approach to business credit; bulk up now, from multiple sources.

Don’t share too much of your plans with your employees. Ten years ago, your employees felt secure; savings were increasing, housing values were going up, and the news was good. Today they’re tired, nervous, and watchful for any threat to their families’ well being. Most importantly, they’re suspicious of business people and their true intentions.

Your employees are right to be cautious. They may not have any financial “cushion” left after losing equity in their homes, having to support grown children, and watching their retirement savings stagnate. They don’t have anything to share after the recession of 2007. From their perspective, they can’t afford to trust us when we say that “we’re all in this together” and “we’re going to share the pain”. Be realistic; don’t expect your employees to keep working ever longer hours, or stay on despite pay cuts or furloughs.

Don’t focus on customer service. Ten years ago, or even 5 years ago, you were probably your customers’ richest source of advice about your products and services. When you offered free workshops or hosted demonstration days your customers appreciated that you were offering something unique. Today there’s the net, and everyone’s sharing stories and advice online. Things have changed and your company’s customer service isn’t unique value added anymore. Doubling down on customer service during tough times doesn’t necessarily mean that your customers will appreciate more free help; they’re already finding plenty of it on their laptop screens.

Don’t make a priority of increasing employee productivity. Recently, I’ve read a lot of advice about improving productivity as a way of coping with recessionary times. That advice was sound 5 years ago. But the 2007 recession and 5 years of cost-cutting have leaned out many markets and many companies; There’s little leftover low hanging fruit for productivity improvements. So… if your business practices continuous improvement, there’s no reason to stop. But today, there are few easy pickings and generic advice about improving productivity will probably just distract you from more useful approaches.

Plan Now to Grow Your Business Base

Most well-meaning advisors start with a belt-tightening strategies. That’s sound but overemphasized advice for today. We’re not coming off a period of strong economic growth. During the last 5 years we didn’t dramatically expand inventories, increase our staff, or begin large-scale capital improvements. Crash diets aren’t a good idea if you’re already lean.

Instead, I recommend you refocus on growing your business and customer base.

Get to know your customers better. When times are good, the best time to get to know our customers better is when they’re doing business with us. During a recession, they’re not coming through the door, they’re not logging on… in short, they’re not making it easy for us to keep in contact. Out of sight, out of mind. But this is exactly the time when we want them to think of us first.

Your challenge and mine is to remind them we’re here when they’re not shopping. It’s much easier to do that when you have more chances to reach them; and do that, you need to know more about them so that you have more opportunities to interact.

Grow your potential customer lists. Email and/or snail mail lists are our recession lifeline to our customers. I’m not going to make recommendations about growing your list, because everyone (and I do mean EVERYONE) already has; just Google “how to grow your email list”. But you should do it because your response rate will go down during recession, precisely when you want to reach a lot more prospective customers.

Prepare new descriptions of your existing product and service lines. While our products and services might be selling well now, that could change quickly as our customers adjust their outlook and perceptions. When they feel tapped out and anxious about the future, consumers often make their buying decisions based on near-term money-saving considerations like low cost and low operating expenses. Highest overall value, additional features and the like lose their appeal. You could change your product mix… but I recommend that you start simply by side scribing your existing products differently. Appeal to low cost and low maintenance first. Then, remind your customers that you’re familiar and trusted. Suggest that if they buy your product or service they can forego another purchase (example). Say that your product or service complements/completes something they already own (example).

Start, now, looking for one or two more product or service lines. Still, as our customers are adjust their thinking, we should follow suit. Remember that low end model you stopped selling because it was barely profitable? Restock it… it may be all your customers can afford right now. Ask your employees to start listening carefully every time a customer says “do you have…?”; save your customers some driving mileage by promoting yourself as the single destination. If you’re in a services business, put your pride on the shelf and do basic work that barely covers your operating costs. The goal, again, is to expand your total sales so that you can keep covering your fixed costs… or build a bit more cash. It’s painful to forego profits… but rule number one is to survive. Only then can you obey rule number two and make a profit.

Plan Now to Build Cash and Prepare to Tighten Your Belt

We’re focused on growth, but we still need that cushion of cash and that cash flow to cope with the unexpected. Just as importantly, we need to adjust the way we work our business’ stakeholders: our customers, our employees, our creditors and our suppliers.

Comb your overhead expenses to find savings your customers won’t notice. There’s no secret to this advice; it’s tried and tested. I’ll only add that you should put exempt your advertising budget, and keep the cash savings in the company to help build your cash cushion.

Very quietly, assess which of your employees might need help if you have to cut back. Employees have had a rough time of it the last 5 years. We hope not, but it may be necessary to cut hours or even staff to survive. For those employees and for our own piece of mind, they deserve some careful consideration about easing their pain. Across the board reductions in hours might give way to preserving full time hours for employees with children. For employee-owned firms, selective stock buybacks might be just what some families need to stay solvent. If you’re disposing of excess equipment, can an employee (or their church) benefit from a timely gift? Now, while you have time, prepare a list of your most vulnerable employees and consider each one’s situation individually.

In union shops or highly regulated industries this kind of individual consideration may not be possible.

Examine your personal rainy day fund. Don’t leave yourself out. If you’re like so many of the best business owners I know, belt tightening starts at the boss’s door. Review your personal finances to find out how long you can forego salary, or what might happen if you leave this year’s profit in the company as retained earnings. This is personal psychological triage; If you plan now, you’ll accept discouragement now and it won’t distract you later on when you need to focus on the business.

Figure out at least two different ways to finance your business. My recommendation for finance in recession is to get yourself some suspenders to backstop your belt.

Here are a few examples:

  1. Use retained earnings: I never followed the advice that suggested retained earnings were a bad use of funds. In uncertain times they made for a good night’s sleep for everyone at my company. And once… just once… they were the difference between cash-starved bankruptcy and survival. You can’t buy that form of business insurance at any price.
  2. Use your non-retirement savings: I always had a part of my savings that I mentally labeled “The Bank of Chadbourne”. I used it perhaps 3 times in 18 years, extending the company loans of a few weeks to a couple of months. It came in especially handy for those obligations I couldn’t finance from my line of credit because I had no receivable to collatoralize.
  3. Use crowdfunding: Under certain circumstances this “new age” funding source makes a great deal of sense. When you’re trying something new and interesting, when you can clearly identify the revenue stream that will return the investment, and… when you plan ahead for recession, like we’re doing now… consider crowdfunding.
  4. Trade credit: Ask your suppliers about their terms, and consider their history. For instance, it’s not generally known that International Harvester, the early 20th century powerhouse of farm equipment, never foreclosed on a farmer during the Great Depression.

Finally, here are some common financing methods that don’t fit our circumstances:

  1. Find an outside investor: The good news is that you might find that cash cushion. The bad news is that you’ve just sold a part of your business for a song. There are better ways… use them.
  2. Friends and Family: If you’re concerned about being stretched, so are they. Don’t embarrass them by forcing them to tell you “no”.

However you do it, though, please remember this cardinal rule of borrowing. “Borrow a lot, or none.”

Dust off your bootstrap habits. One very good way to save money is to find another way to do it. Here are two of my favorite stories about bootstrapping from that classic of small business literature, Paul Hawken’s “Growing a Business”. The first is a wonderful vignette showing how to bootstrap a competitive attack into a publicity extravaganza:

Ben and Jerry’s (the ice cream makers) reached a turning point in their business when Pillsbury purchased competitor Haagen-Daaz. Pillsbury apparently put pressure on distributors to remove Ben and Jerry’s from their product line. Although their first thought was to sue, they realized that a court case would drag on for years, be very costly, and might result in their near-term bankruptcy. So they started a bumper sticker campaign that ballooned into their most successful “marketing” campaign. It started off with Jerry standing in front of Pillsbury with a picket sign that said “What’s the Doughboy Afraid Of?”. Then came the bumper stickers with the same message. Then the ads in buses… The media jumped on the story… Publicity mounted… Finally, Pillsbury relented, and Ben and Jerry’s was back on the shelf next to Haagen-Daaz, only now with enormous exposure and publicity.

The second is one of those lunch stories that shows how much you can save if you do it yourself:

My friend and I were having lunch when the subject of (catalog) production costs came up. I asked him how much he spent and he replied nearly $100,000 for production alone. He noticed me choking on my dim sum and he asked me how my last catalog had cost…

His photography cost $25,000. Ours cost $4,000.

His layout and design team ran $25,000. Our in-house labor came to $6,000.

He paid $15,000 for typography. We paid $2,700.

He paid $5,000 for a stylist. I asked who or what that is.

He paid $82,000 in total. Our catalog cost us $12,700 for the same number of products and pages.

Double up on critical suppliers. Suppliers, too, have been strained in the last few years. Your situation may, ironically, be complicated because you’ve spend the last couple of years winnowing your suppliers to achieve a lean supply chain. Now though, thinking about recession, you’ve realized that your business is only as resilient as your supply lines.

Now’s the time to get to know some other suppliers. Like financing, the belt-and-suspenders approach is a good idea… but for different reasons. Recessions themselves have become more uncertain, and with the best of intentions no company can be confident of making all the right decisions. That includes your suppliers. It’s time to insulate yourself from your supplier’s judgement calls by cultivating alternative sources of supply.

Summary of my Small Business Preparation Advice

Ignore misleading and outdated advice: 

  • Don’t make a priority of working with your bank loan officer (he no longer has discretion)
  • Don’t share too much of your plans with your employees (they’re already tired and edgy)
  • Don’t focus on customer service (your customers have all sorts of free service available, courtesy of the internet)
  • Don’t make a priority of increasing employee productivity (there’s no more slack after the last recession and lackluster recovery)

To grow your business base:

  • Get to know your customers better
  • Grow your potential customer lists by broadening your advertising to reach more prospects
  • Prepare new descriptions of your existing product and service lines to emphasize low price (not high value), low near term operating costs (but don’t try and sell “making back the higher price”) “replacement” and “complementing” capability
  • Start, now, looking for one or two more product or service lines and figure out how you can do that business at cost (your goal is not to make profits, but to cover your overhead).

To build cash and prepare to tighten your belt:

  • Starting right now, comb your overhead expenses to find savings your customers won’t notice (your larger goal is to lower your fixed costs while building your cash reserve)
  • Very quietly, assess which of your employees might need help if you have to cut back
  • Examine your personal rainy day fund
  • Ask your accountant to help you figure out at least two different ways to finance your business if your bank slashes your credit line in half. And don’t forget to dust off your bootstrap habits.
  • Double up on critical suppliers

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