Chad M
Chief Economist & Director of Economic Research at U.S. Small Business Administration, Office of Advocacy
What measures should small businesses take to weather this economic downturn?
Clarification added September 24, 2008:
Other possible questions include:
(1) As the economy tightens, many small businesses are looking for ways to respond to today's market conditions.
(2) In your opinion, what are the effective measures that small businesses can take to weather the downturn?
Chad Moutray is the Chief Economist at the US Small Business Administration (SBA), and a featured speaker at the Weather the Economy Forum, a series of webinars dedicated to helping small and mid-sized businesses survive and thrive in a tough economy. Other Forum experts include: Barbara Weltman, Dr. John Jordan, Paul Greenberg, and more. To learn more about the Forum (sponsored by SAP) and share your insights, please visit: http://www.sap.com/mk/get/BLG2
Answers (1,039)
Richard B
Controller at H & H Products Company
Best Answers in: Accounting (1), Budgeting (1), Staffing and Recruiting (1)
Chad,
The one thing I would recommend to a small business is to prepare now for the recovery. In other words, do what you can to take advantage of the market when things turn around. They always turn around at some point. I am sure the people during the Great Depression thought things would never improve but they did.
If businesses just sit around and then make a move after the economy starts to recover then they will be behind. It is a simple answer to a complicated question but the point is to act like a Boy Scout and "be prepared".
Clarification added September 24, 2008:
I just thought of something that I think is funny. Construction, especially home construction, is very cyclicle. It has always been that way and will always be that way. Central Florida has a lot of home builders and subcontractors to those builders. During the recent housing boom they were living it up. The owners and executives of these businesses went out and bought all kinds o new "toys' that they really didn't need. they bought a fleet of trucks (not just one or two to replace older ones), they bought several pieces of heavy equipment, and they even bought personal toys like cars, boughts and homes. Now they are all complaining because business is down and they don't know how they are going to survive.
I saw this while it was happenning and said they would pay later. I am sorry, but I do not feel sorry for them. They needed to put the money away for the down turn they knew would come. The really funny part is that I know this but no one will hire me in that industry because I don't have construction experience. HA! Where are their "experienced" accountants?
Lesson for other small businesses, be frugal. Do not hire unless you absolutley have to at this point or they can add more value than what they would cost. Do not expand beyond what your cash flow can support today.
Thanks for letting me get that off my chest.
Hi Chad
I've just posted a BLOG today (September 24th) on this at www.businessingeneral.com entitled 'Planning in times of uncertainty'. The BLOG references two articles I have recently written ( too long to republish here).
regards Alan
Links:
Robin Fray C
Content Strategist and Social Media Entrepreneur, Social Media Today LLC
I like the answers about focusing on growth, because there are a lot of opportunities in this crisis if you look for them, particularly in being able to hire experienced professionals. Also, shoring up alternative financing will be important because it's safe to assume that commercial credit will be difficult to obtain.
More discussion on this with Chad and others can be found here: www.myventurepad.com/HUB... looking forward to more "live" tomorrow during the webcast.
Links:
Hi Chad. My humble opinion:
(1) keep on top of cash flow
(2) be aware of timing effects across the balance sheet...you don't want lots of WIP/inventory you can't sell (specifically, I'm thinking those firms with Seasonal demands)
(3) stay as liquid as possible (lease, lease, lease, don't buy)
(4) if the business has "inferior" products/services, start to push those ...this downturn is likely to last a little while. There are opportunities, they're just different.
(5) be aware of the effect of the downturn on customers, and market propositions to assist in their changing demands (kinda like (4) really).
Small businesses should shore up their courage and dare to be contrarian. When everybody is cutting down and reducing spending on advertising, product development and marketing, that is when I believe some of the biggest opportunities present themselves. This is the best time to aggressively increase market share and acquire new customers. Furthermore the media companies and related industries are also likely going to be a lot more flexible offering attractive rates for small companies.
SME’s still have to be cautious and selective in how valuable resources are spent. Small business should reduce fixed costs as much as possible. All savings from cutting fixed costs should then be redirect into focused marketing efforts to gain and catch up with your competitors. When we come out of this economic cycle you will likely have gained significantly compared to competitors who cut advertising and marketing spend during the downturn.
Think about it. Businesses who dare to be contrarian in their actions are the ones who often benefit most in the long run. Carpe Diem!
Stop spending money now. Cut back everywhere you can before deciding that you have no choice but to let go employees. Make a list of things you will need when this is over. Keep the list up to date. The downturn might last awhile, and technology will continue to move ahead, albeit at a slower pace. Don't expect to pick up where you left off when things get better. After every long or deep recession, the world is a different place, and people's habits change. Cool before the downturn will be so uncool when things heat up again.
The key, in my opinion, will be liquidity. Banks are tightening and lines of credit will be increasingly difficult to obtain. I think the motto for the next year will be, “cash is king”. This also means that there are good rates to be had in the overnight market and this may be a good time to take advantage of any excess liquidity.
Simple: Be patient. Prepare for the turnaround.
Ryan B
Biopreneurs: The Molecular Millionaires
Best Answers in: Venture Capital and Private Equity (1), Government Services (1), Treaties, Agreements and Organizations (1), Advertising (1), Professional Networking (1), Starting Up (1), Biotech (1), Using LinkedIn (1)
Hello Chad,
I am a business counselor for the SMEs (SBDC-SBA),
Rule is the same - Do everything possible to stay alive. SMEs can do some generic common sense base measure and rest should be specific to thier particular business -
Some tips:
(1) Reduce all fized cost to allmost minimum. And do again - minimum cost measure - continue to do so until one is in the positive ROI.
(2) If necessary cut products line that are not positive ROI.
(3) Look for International market (even one is a small busines).
Rgds
Ryan Baidya
California Takshila University
Links:
Small businesses should closely examine all business processes for redundancy, uneeded FTEs and leaks in the processes in an effort to optimize them to reduce overall costs. This usually involves an outside in approach to business process management and optimization by employing a consultant and or computer systems integrator or vendor with a services arm to conduct a joint value assessment of the process. Once the JVA is completed then enabling technology solutions and other simple organizational strategies can be executed to optimize the process which can reduce costs and increase business velocity with suppliers, networks and customers.
Peter A also suggests these experts on this topic:
Jim C
marketing, writing about and promoting supply chain systems
Best Answers in: Supply Chain Management (2), Inventory Management (1)
key changes to product lifecycle and supply chain management processes are indicated for two reasons: 1.) reduce current expenses and cut costs 2.) improved positioning during recovery.
Both of these will increase profitability in the short term as well as improve a companies position in the future. With technological and process tools available (Low cost, high value) to companies. The goal here long term is to be in a good cash position during recovery as well as having the assets (Processes) in place to grow or capitalize on future opportunities.
Mark H
Director of Content Development at Winning Workplaces
Best Answers in: Budgeting (1), Quality Management and Standards (1), Small Business (1)
We recently surveyed leaders of some of the top-performing small organizations we've honored for having exemplary work environments (the Top Small Workplaces and Best Bosses) and what they told us was the following:
Cutting Back On
- discretionary spending, especially travel/events
- reducing soft benefits like gym reimbursements
- reducing purchases of non-essential items and re-shopping major purchasing categories
- reducing frequency of cleanings of facilities
- hiring freezes, not replacing empty positions created by attrition
- cutting staff
- implementing four-day work week
- eliminating salary increases
Some are also Investing More Heavily in their orgs by:
- stepping up efforts to recruit top talent
- continuing or expanding programs to train and develop employees
- diversifying or expanding their product/service offerings
- researching/implementing proven QA/QI practices
Hope this helps!
Links:
Mark H also suggests these experts on this topic:
I think there are two key steps a small business needs to take during difficult and uncertain economic periods such as this current one. First, now more than ever they must absolutely focus on having the correct operational cost model in relation to their revenue. This needs to be based upon current as well as a forecast looking at least twelve months out.
Second, they need to take a hard look at what business they are in, and no matter what it is, be certain that they can differentiate themselves from the competition. In conjunction with this step, if they offer more of a discretionary product or service versus a necesaary one, they should take a look at how to reduce the discretionary aspect of their product/service. This is due to the fact that those who spend in times like these, will also reduce spend and give priority to must have versus nice-to-have.
Chad,
All comments about preparing, etc. are valid. However, Small Business should see this as an opportunity to distance themselves from the competition and especially from the larger companies.
Spend some time in your own head (since you know the business and your market(s) best) brainstorming a list of things you can do by virtue to being smaller, more agile, specifics that you know that they don't, etc.
When stability returns (at least to some extent) my startups have generally come out of these types of down-turns well ahead of where they were in relation to their direct competition on as well as with regard to all the others.
This is also a good time to do some market-gap analysis and see if there may be some "low hanging fruit" (that you've missed before, or, better yet,) because of the downturn (it sometimes forces larger companies to do some things differently that you may not have to do).
Finally, you got into small business because you liked the risk-reward tradeoff, so, now will be the tie to go where you are convinced you should go..., if there is risk in the path, less others will follow. If you are right, you could make some huge gains. If you are wrong, you'll have to mitigate.
Best,
Mike Saurage
(...looking in Austin)
Externally -
Pick up the phone, engage with your customer base. (less emails, more phone)
Internally -
Tighten belt on T&E.
Tighten belt on new hires.
One simple measure that all businesses should take at this time is to conduct a review of the terms of their merchant services agreement. It is entirely possible that many small businesses are paying too much for the processing of their credit card transactions.
The first thing the business owner should do is calculate their "effective rate." Many in the merchant services industry dismiss the effective rate as voodoo, but there is no more transparent a measurement than the true bottom line.
Simply refer to your most recent monthly merchant statement, and divide the total volume processed that month into the total fees that were deducted from your account. This gives you your effective rate, or the true percentage that you paid your processor that month.
If the ER is more than a couple of percentage points higher than what you understood your discount rate to be, then you ought to have a frank discussion with your current processing partner. I've personally seen merchants save hundreds, if not thousands, of dollars per month after conducting such a review. This effort won't drive anyone into early retirement, but every little bit helps.
Pay down debt with any excess cash, and improve the balance sheet. Go after overdue receivables aggressively. Dont be weak handed with non-payers, and diligently seek payment.
Increase time allowed on training, to become more proficient, and efficient. Be sure you are an expert in your field, and practice while its slow.
Reconcile business practices to allow for more One-Timing of day-to-day operations. This reduces the minutae of day-to-day production.
Circle the Wagons !!!... be sure that the focus you have is the same focus the business needs in order to achieve plan metrics.
Increase/ allow cap ex spending on critical and necessary items, and limit fringe spending.
Keep the employees' structure moving forward. When you start rocking the boat with employees, they will tip it. Keep your employees confident in you and the company, and you will control the outcome of the company's direction with happy employees. Dont push them out, when bringing them closer is what is needed.
Larry B
Director of Decision Analytics at IHS Global Insight
Best Answers in: Career Management (20), Education and Schools (11), Organizational Development (7), Change Management (4), Staffing and Recruiting (3), Business Analytics (3), Equity Markets (3), Ethics (3), Risk Management (2), Corporate Governance (2), Regulation and Compliance (1), Certification and Licenses (1), Job Search (1), Mentoring (1), Occupational Training (1), Resume Writing (1), Currency Markets (1), Non-profit Management (1), Quality Management and Standards (1), Professional Networking (1), Biotech (1), Computers and Software (1), Web Development (1)
Hi Chad,
The answer really depends on the type of business the small business is. As some have mentioned, the current economic crisis presents a variety of opportunities. Many small business can take advantgage of these opportunities and grow. In fact many small business are likely to spring up from this as well. Undoubtedly with a $700billion package being talked about there will be money available for small business to contribute in some way to moving the U.S. out of this crisis.
However, not all business are ones that can directly benefit from the economic conditions. What should they do (I think that's what the crux of your question was about anyhow)? The first thing I would suggest is to follow the developments on Capitol Hill as well as Wall Street and think about how what's happenning is going to directly an indirectly affect their business. Will you be needing credit? If so you may need to have a larger downpayment or more equity in whatever it is you're buying. Now may be a time you need to save more so that you're ready to go when the downturn turns around.
Will/should your business model change? Will there be the same need for your products or services? Should you open a new line of business in anticipation of your current one slowing or disappearing?
The lesson from the large company failures is important to the small business -- liquidity is important. Even if you're selling products and making profit, if you don't have access to cash when you need it, your business is in trouble.
Make sure you're keeping good financial records so that you can demonstrate to customers and lenders that you are stable and will be around to finish the job. If you're a building contractor this might be especially important because who will give you an up front deposit if they think you might be out of business before the project ends?
Build up cash so that you have it on hand for when you are ready or need to move. If you're in a business that can benefit from the current situation, then you should consider whether now is the right to to jump in and spend.
I hope this helps.
Larry
I would do the opposite of almost everything that everyone else is doing/saying!
The strong will survive!
1. Eat your numbers for breakfast, lunch and dinner and then eat them again!
2. Have as much liquid as possible! Find Cash!
3. Unemployment at 6%...? Now you will find highly skilled employees in the “Job Pool” looking for a life raft. Do not freeze..Keep your eyes open and recruit aggressively the talent to get you through all of this.
4. CO-BRAND! Reach out to brands that will help compliment and strengthen your brand.
5. Look for deals out there on EVERYTHING! … don’t pay full price!
When your enemy is scared… Attack! There is a lot of opportunity out there with the fear in the air.
Things that small business need to do to weather the current economic situation can be listed as below
1.Streamline systems and process in the company both at macro and micro levels
2 Look at increasing productivity of employees through training and motivation
3. focus on core strength of the business and develop and strenghten core competencies.
4. Increase levels of customer interaction and client servicing for getting positive word of mouth from customers ( cheaper and more effective way of brand building and marketing
Bill M
☆ Global Health Biz Dev ☆ Real Estate ☆ Nutritional Consultant ☆ Efusjon Executive ☆
SOME IMPORTANT STATS ON THIS IMPORTANT TREND:
50% of this country's business is run by small businesses
70% of small businesses are HOME BASED
With so many options out there, how do you know what will work for you? ALWAYS keep these 4 things at the forefront, and you can't go wrong.
1. Huge Expanding Markets
2. Unique Consumable Products
3. Timing
4. Leverage
THE BEST advice bar none in weathering ANY economic condition is to develop multiple streams of revenue. Just because you run a business does not mean that it should be the only business you run. Expose yourself to different opportunities, industries and revenue streams (some that are easy to implement and self sufficient - ie no shipping or billing etc.)
Use the above criteria, and the economic downturn will be non-existent to you.
Also, CUT COSTS!
An FYI to anyone that lives in TX, NY, IL, OH (and soon every state in the US), you need to see what is happening with the bill congress passed on energy deregulation.
Check this website out, it is a TREMENDOUS opportunity: www.energybillm.energy526.com
This company is backed by Shell/Dutch Petroleum (3rd largest $500 Billion company in the world) and run by Dallas based Southland Corp. so you do not have to worry about the legitimacy of this. Watch the videos and contact me with additional questions.
Bill Muth
National Deregulation Specialist
energybillm@ aol.com
www.energybillm.teamambit.com
www.freeroadtowealth.com
Links:
I feel that the most important measure a small business owner can take during good times as well as bad, is to have a comprehensive business plan that forcasts both the best of times and the worst of times. Having owned my own small business back in the late 80's, I know from personal experience that not identifying the worst case scenario can catch you offguard when times get tough! Determine now how you will maintain or grow your business without easy credit or higher borrowing costs. Evaluate your business model and watch your cash flows! How valuable is the business if you never get paid for it!
Chad,
great question....first and foremost, small businesses should take this time to really concentrate on their current customer base (get to know them even better and build a stronger bond). During market contraction times too many small businesses lose sight of their loyal customers in the interest of growth. Second, I think this is a great opportunity for businesses to utilize and further apply cost-effective guerilla efforts to grow their business at a fraction of the cost. Finally, these are the right times to purchase technology and tools that will help their business in the future. In a nutshell, be aware of your finances, but always keep an eye on the future.
SY
Susan S
Oppenheimer & Co. Inc., financial marketing writer.
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Run as lean as you can, without causing company morale to deteriorate. People can tolerate hiring and salary freezing better than they can layoffs and outsourcing.
Renegotiate loans, lines of credit, etc. to be as favorable to you as possible and use them as little as possible.
Draw up your plans for expansion and polish them so that they are ready to go.
Think in terms of logistics (daily), tactical (short-term), strategic (long-term) and grand strategic (way down the road when things are good again).
Differentiate yourself from your competitors in all ways. Deep six non-core products or unprofitable or outmoded lines; focus on providing superb and timely service.
Build your brand, not necessarily by advertising but by doing community service.
Become thought leaders in your community so that people turn to -you- for goods and services.
Don't let things slide, because they'll cost more to fix.
Without being hokey, keep morale going.
Realise that need to plan in all stages of the cycle that way they dont act as harshly in the bad times because they being reactive rather than proactive. They should measure performance at all times so that when things do worsen they know what part of their budget gives them the best ROI. Most SMEs underestimate the need for planning seeing as something the large companies can afford to do.
Links:
For small businesses to survive they will have to keep and or increase sales. In a down market, I would look to do deals at a minium instead of trying to make alot of money on a deal. expenses are a priority in a down market, need to be fiscally tight, microeconomic and micromanagement play a very important role, need to be more productive
Cut back on everything apart from Advertising, your PPC campaigns should hopefully be lower with less businesses willing to spend.
Those businesses which can should diversify and seek out external markets. The downturn of the US economy and fall in their exchange means close neighbors have good buying power and will welcome the opportunity to buy new products. Having lived in a country that experiences dramatic downturns every time we experience a military coup, I can safely say that diversification and expansion into overseas markets has helped us weather the most difficult of times.
There are many great suggestions that have been put forth by other contributors, but I think the greatest lesson of all is not to put all your eggs in one basket.
My theory is that the economy is reversing polarity from a supply-side system to a demand-driven system. The old boys have lost their grip due to the increasing complexities of the information explosion caused by consumer's use of the internet to become informed consumers.
My answer? Share this link with all of your employees so they can reduce their cost of living and drive forward the economy by driving the manufacturing of new products that help us live well while living green.
http://livinggreenlivingwell.com
Peace.
James
PS enjoy some tunes while you're at it.
http://myspace.com/jackknightsingersongwriter
Links:
Shaun V
Results driven Executive level Technology Manager, Project and Infrastructure Manager
I believe Dave Ramsey said it best "Debt is the #1 killer of small business" run the business cash based and then you can weather any downturn in business. I ran a successful eBusiness for 12 years before selling it to a competitor.
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