There is an old joke about two campers who stumble across a bear in the woods. Angered at being disturbed, the animal runs headlong at the campers. The campers turn and flee. The beast shows no sign of giving up the chase, so after a while one camper worriedly says to his pal: “I don’t think we can outrun this bear”. The other says: “I’m not trying to outrun the bear. I’m just trying to outrun you.”
Almost all markets have turned bearish of late. How should the small business react? Not panicking is a good start. However gloomy conditions may seem, they will be gloomy for competitors too. Downturns are the economic equivalent of Darwinism – a test where the fittest survive. The primary goal is survival, especially for small businesses that lack a deep well of resources to help ride things out. The secondary goal is living well, keeping strong and gathering the resources that will improve the chances of surviving any unforeseen problems that lie ahead. Surviving hence means having a keen focus on all the advantages and efficiencies that may seem small in scale, but could make the crucial difference between the business that fails and the business that survives to enjoy the eventual recovery.
Staying One Step Ahead of the Bear
A good place to start is with some cold hard calculations. What does your business need to do to survive? Forget profits for the moment. Cash is the lifeblood of a business. Businesses disappear for the lack of cash, not for the lack of profits. Think about cash, where it comes from, and where it goes to. Think also about reserves of cash the business can draw upon. Identify what the business needs to do to make the cash that will keep it alive for a month, 3 months, 6 months, and a year. If things get really desperate you may need to shift timescales to weeks or even days. Do not spend so long playing with numbers that you forget to actually run the business, but make sure you know what the cash targets are and keep them up to date as time passes and circumstances change. Replace any existing business targets with cash-oriented versions of them wherever possible. For example instead of paying commission to salesmen based on taking an order from a customer, pay commission based on the receipt of payments from the customer; this will encourage people to prioritize the best payers.
Once the cash baseline is understood, identify every opportunity to lower the baseline or make it more flexible. Identifying opportunities does not mean acting on them immediately, as many of them will involve a trade-off between cash today and profit tomorrow. But identifying the opportunities means you will be ready to take the pragmatic steps needed to keep the business running during its darkest days. That advice may seem obvious, but even big businesses can struggle with this: the American automobile industry with its high fixed costs and over-reliance on achieving a high volume of unit sales is a very topical example. To further understand and manage the baseline, consider the following questions:
1. How flexible is your business, and how easy would it be to scale things down, if sales were weak, or scale things up again, when new sales opportunities arise?
Consider the extent to which your costs (including people, equipment, materials and property) are fixed or vary with sales. If you have fixed costs, consider how these might be turned into variable costs. For example, could you move into smaller offices or close an office and only rent additional space on a short-term basis from a provider like Regus when really needed? Instead of tying up money by holding stock, it may be worth switching to a supplier that can guarantee rapid delivery when you need something. If you have employees, instead of just cutting back on staff, you may be able to negotiate more flexible arrangements where they get paid when there is work to do, and not when the order book is empty. Though some may find that hard to accept, if you are frank and honest with staff they may prefer to come to terms with you and get some work, rather than risk the collapse of your business and the prospect that they will have no work at all. At the same time, identify ways to increase manpower at short notice. Survival is also about being able to take advantage of the fewer opportunities that come your way.
2. If a key supplier fails, does your business fail?
Getting a good deal from one supplier can help keep costs low, especially with discounts for bulk purchases. However, look hard at any key suppliers and understand if there is a risk that they might fail. Think ahead and judge the difficulty of switching suppliers at short notice. If there is a danger that a key supplier may fail, establish a relationship and make some purchases from an alternative now. This will reduce the impact if the worst happens to your normal supplier.
3. Where would you turn if there was an emergency, and your business faces insolvency if you cannot find a quick source of extra cash?
Overdrafts are one answer to this problem, but when businesses are under strain, the overdraft can stop being a temporary source of emergency money and can start becoming a permanent crutch. The danger is this crutch can always be kicked away at a moment’s notice. Instead of relying solely on the bank, there may be other, better options. They may involve sacrificing longer-run profitability in order to generate some cash inflows immediately, but recognize that there will be no profits if you cannot survive long enough to realize them. For example, a large customer may be given a generous one-off discount in return for early payment or prepayment of a large invoice. Stock may be sold at a loss instead of keeping it in a warehouse. Selling some of your retail debtors to a factor would enable you to get discounted cash inflows immediately. Suppliers may be willing to provide extra credit rather than lose a reliable customer because the business failed, especially if you can commit to making purchases in future.
4. Are there ways to reduce costs by thinking ahead?
If you have more room for movement, now may be a good time to make investment decisions designed to help reduce your cost base. For example, heavy discounting may make this a good time to buy essential equipment instead of renting it, so long as you have the resources to cover the initial outlay.
Beating Competitors in the Long Run
Staying ahead of the bear is of little benefit if you keep running in blind panic and die of exhaustion a while later. Even in a downturn, a business also needs to plan to conserve resources and stay healthy relative to its competitors. Be prepared to sprint for short whiles to stay alive, but also plan to outrun your competitors in the longer term. Have the flexibility to deal with a crisis, but do not expect to operate in crisis mode forever. Conserving the resources of a business also includes conserving the energy and goodwill of its workers. That includes you, as the boss. Think of managing the business in a downturn as a two-step decision-making process. Surviving from one day to the next may necessitate some desperate measures, but once the immediate threat has subsided, you need to pace the performance of the business and try to ensure you secure the future as well as the present. Once the baseline for survival is understood, you will know what additional options you have to make decisions designed to improve profits. When you know the cash position is reasonably secure, as far as can be predicted, shift your thinking towards improving the profitability and hence generating the reserves that will help you cope with any further unexpected downturns. Improving profitability may seem implausible in a depressed market, but the question here is not the profitability of your business from one year to the next, but the relative profitability of your business compared to rivals. Here are some questions that are relevant to improving the profitability and health of a business in a downturn.
1. Where might you turn for alternative sources of investment funds?
During the downturn, banks will try to rebuild their balance sheets, and investors will rethink their attitudes. Try to turn a negative into a positive by looking again and seeing if there are better potential sources for investment in your business than the ones you previously considered. If you solely own the business you run, be clear about how much income you need from it. A paycut now may lead to greater returns later. If the business owns its equipment or premises, it may be able to sell them to get an immediate source of capital, but retain the use of the asset by leasing them back. Chastened by a depressed stock market, friends, family and employees may prefer to put any spare money into your business, one that they know first-hand, instead of backing enterprises they know relatively little about or earning meagre rates of interest from banks. During a time of turmoil, big and regular customers may be willing to secure your services and survival by making long-term purchasing commitments. In a similar way, you may be able to keep your business costs down but guarantee the discounted services of a supplier by offering them a revenue-sharing deal on larger contracts. In addition, think seriously about retaining as much profit as possible for both reinvestment and protection against any unexpected hiccups. Low interest rates for the foreseeable future means that early repayment of debt is of less benefit than it was.
Small businesses should not overlook the few opportunities for government assistance that are out there. Assistance may come from local or national programs, and the biggest challenge for small business is often the task of identifying what help they may be eligible for. For example, a business that does research may be eligible for the Small Business Innovation Research (SBIR) program. Government initiatives like this are likely to be favored by Obama’s presidency, so small businesses would be wise to stay aware of new funds and changes in rules. It may even be worth adapting the business model to take advantage of such funding. For example, instigating a novel research project backed by public money may be a way to retain and utilize staff that would otherwise be made redundant.
2. What is your niche or Unique Selling Proposition (USP)?
In a downturn, many businesses find themselves competing on price. However, a business can make itself less vulnerable to competitors' price cuts by offering something unique. If a small business is going to rationalize, it should eliminate its service or product lines that are peripheral or loss-making, and concentrate its resources on its core strengths and most profitable lines, whilst identifying the main competitors for those particular lines. It may be embarrassing or seen as a sign of weakness to curtail some offerings, but it is better to divest and survive then to persist with unprofitable lines and be dragged under as a consequence. It may also be wiser to allow rivals to win new sales at little or no margin, instead of trying to match their prices. Whatever the core offerings are, identify ways to distinguish them from those offered by rivals. Speak to customers, and make sure you know what, apart from price, motivates their purchasing decisions. Simple but successful techniques for small businesses tend to emphasize their smallness. For example, customers may be seeking a more personalized approach to customer care. If you are clear and straightforward about communicating your USP to customers, they may help you greatly by repeating that message by word of mouth and hence fostering further business for you.
3. Who offers the best support for your business?
At a time of upheaval, businesses may feel locked-in to their current banking arrangements, or may prefer to stay loyal to those they have dealt with previously. However, with everything changing, now is a good time to double-check that the business is still getting the best deal. Review deals on overdraft facilities, compare rates on foreign currency transactions and examine returns on deposits. Insurance will be another financial service that will be rocked by recent events. Shop around for the best insurance for all aspects of your business as premiums may have changed considerably.
In the same vein, be sure to reconsider all suppliers, from legal advisors to stationery suppliers to janitors. However, be wary of false economies. If inferior quality from your suppliers has a chain reaction that impacts your customers, it may cost more than it saves. Remember also that there is no saving in having busy and talented people - including the boss - doing menial chores because you cut back on basics.
4. What are the best tactics to increase sales?
Increasing sales may seem implausible during a downturn, but staying confident is important to surviving. Some customers, like public bodies or wealthy individuals, will be better shielded from the economic downturn. Try to increase the mix of sales that goes to those customers. One good way to find out which customers are doing best is to actually talk with them. Your business is small, so turn that into an advantage by being close to current and prospective customers. If you treat good customers like your friends, they will care more about your survival and will do more to help you in intangible ways, like giving you advice and helping you to network. Because customers may also be short of cash, be imaginative and fearless about proposing payment-in-kind when there is a chance your customer could also be your supplier. Avoid a formulaic approach to chasing debts and looking for new sales prospects. Try to separate those customers that have a temporary cashflow problem from those that are delinquent payers or time-wasters. By the same token, focus sales and marketing efforts on the most profitable products. It is likely the business will cut promotional costs, but instead of reducing all such expenditure across the board, try to be more targeted and effective with the reduced spend.
If a product is unprofitable, and it is possible to discontinue it without a negative impact on costs or commitments to other customers, accept the immediate reduction in revenues that comes with that and refocus energies on more profitable lines. If a product is failing or unprofitable, but it is not possible to discontinue it, try to boost sales all around by offering your weaker lines at heavily discounted prices as part of a package with other, more profitable, products. Whilst it is tempting to think negatively, do not be afraid to consider offering something new if you believe it has a genuine advantage over rival offerings, or will occupy a unique place in the market that nobody will be able to match. Just take the precautionary step of asking your best customers if the new offering would interest them now, or whether it is best to delay its launch until later.
Like you, competitors may be cutting costs to survive. This may lead to a decline in the quality of their services or products. An alert business may be able to steal disgruntled customers from rivals by promising quality and an attention to detail. This is especially relevant to small firms, which can be more agile and responsive than their larger rivals. Try to make ‘value for money’ your sales mantra instead of simply lowering prices. If ultimately you have to cut prices to stay competitive, then protect your gross margin and future revenues by linking the offer of aggressive discounts to customer commitments to your business. This may take the form of guarantees to buy in bulk or contracts with longer durations.
Despite the downturn, remember why you entered business. Was it just to make money, or did you also believe you could be better than the rest? If your reason is the former, think seriously about how important the business really is to you – it may be better to close it now than risk losing more by keeping it going. But if you believe in your business, then keep faith with it. That belief is also an advantage over the people who just saw business as a source of financial rewards. If you are terrified by bears in the woods, then probably you should stay where it is safe, but if have an inner reason to make the journey, you will be able to traverse the darkest, densest forest and make it through to the other side. Right now, many small businesses are facing stark choices. Belief that your business offers something special, and is worth the pain and struggle you go through, could make all the difference between success and failure. Remember that when reviewing your decisions. Cutting the same costs as your rivals, and making the same choices as your rivals, leaves you no better off than your rivals. Many will be picking cheaper suppliers, reigning in promotional expenditure and preparing themselves to do less at lower quality. Minimalist survival tactics may leave the business so unhealthy that it fails anyway. Running with the herd can be very tempting, but remember the herd mentality is also one of the reasons why the economy is in the mess it is. If your business can positively distinguish itself from the herd, it can still thrive, even in a downturn. Look for opportunities to be better, as well as to survive from day to day. If you can be pragmatic enough to ride out each crisis, but also retain a vision of what makes your business better than its competitors, and communicate that to your customers, you will stand the best chance of doing more than just emerging from the woods. You will also be readying your business to prosper when the dark times are over.