Entrepid

This is Part 1 of a planned series on managing your business during a recession.  Subsequent parts will be linked at the bottom of this post as they are published

I don’t have a crystal ball or some special insight into the macro economy that allows me to say we’re in the beginning of a recession.  The classic definition of a recession is two consecutive quarters of negative GDP growth, and since most recessions are short-lived, we often don’t know for sure that we’ve been in one until it’s over.

What I do know is that how people will react to the possibility of a recession has many of the characteristics of a recession - and can even bring one on .  Now is the time for judicious management, and if not actually growing now, at least laying the foundation for significant growth during the recovery.  Whether we experience an actual recession or just a perceived one, there are things you can do to protect your business and even make progress during turbulent times.

Cash is King - Don’t Let Your Customers Keep Yours

This is always good advice no matter the macro environment, but during a recession it’s doubly important.  When businesses sneeze, their vendors are often the first to catch a cold.  Delayed payments become common and bad debts increase.  You don’t want to be the vendor left holding the bag.

If you begin to have customers and clients who used to pay on time but now don’t, it’s a good sign they’re experiencing difficulty.  Many will try to ride out hard times by borrowing to fund operating deficits - borrowing from vendors through increased A/R and stretched-out payments, borrowing more on lines-of-credit, maxing out on credit cards.  As soon as you see this happening with a customer, you must be pro-active.  Waiting will just get you stuck at the back of the line and you may never get paid if your client goes bankrupt.

Here are three things you should do right away with slow payers:

• Lower their credit limit with you, and/or
• Put them on COD.
• Intensify collection efforts and don’t let up until you get paid.

Awhile back I did a series on 15 Things You Can Do To Get Paid Faster.  Now would be a good time to read it and implement some or all of the suggestions.

Restructure Your Borrowing

The Federal Reserve has been on an interest-rate-lowering tear lately, but it can’t, and won’t last forever.  Inflationary pressure and the weak dollar will force the Fed to raise rates again as soon as they feel the danger of a recession has passed.

Take advantage of the current situation and look at your business borrowings to see if you can lower your interest expense and/or stretch out payment terms to preserve cash flow. 

Specifically:

• If you’ve used a first or second mortgage to finance your business, look into re-financing to lower your interest rate, and/or
• If you’ve used a HELOC (home equity line-of-credit) to finance your business, consider a re-fi into a fixed-rate, fixed-term mortgage to lower your rate and stretch out payment terms.
• If your financial situation is still strong, consider obtaining a fixed-term working capital loan (the SBA has some good options) to pay off higher interest rate credit cards and unsecured lines-of-credit.
• Take advantage of credit card offers with zero-interest balance transfers.

If you haven’t sat down with a good banker in awhile, now would be a good time to do so.  Tell them you want to restructure your business borrowing and see what they can do for you.  You’ve probably heard about a "credit crunch," but I’m not seeing it in the small business lending arena.  Banks are still lending money to quality businesses.

In Part 2 I’ll be concentrating on Cost Control - the right way.  In the meantime, go collect some overdue A/R!

Here’s the link to Part 2 - Cost Management and the link to Part 3 - Marketing.

Conversation Starter, the free online companion to Harvard Business Review, has a long blog post / short essay on Staples attempt at new strategic innovation.

You should read the whole thing, but here are some nuggets:

…all strategies have a sell-by date. Just because you were a successfully disruptive business doesn’t mean you can’t fall victim to the same forces. Competitors will come, and absent entry barriers, they can simply copy what you’ve successfully done (without all that time-wasting analysis and experimentation to figure out the model, too).

Call that the Microsoft strategy.

Customers will — most irritatingly — take what used to excite them in the past for granted.

Remember, your customer is not your friend.  At its core, the customer-vendor relationship is a commercial one, and the minute you cease to provide value to the customer, they will depart.

But, no law says you have to do business with customers who don’t bring value to you as well.  A healthy business relationship is one in which both sides win.

Mark Cuban, of Dallas Mavericks fame, has a post on his rules for startups.

My favorites are:

1. Don’t start a company unless its an obsession and something you love.

2. If you have an exit strategy, its not an obsession.

4. Sales Cures All.  Know how your company will make money and how you will actually make sales. (emphasis mine)

 

He also links to a post, How to Save Money Running a Startup, by Jason Calacanis that has some really good tips for cost control that can be used by an existing small business, not just a start-up.  Be sure to read the comments too for some other good ideas.

Sometimes in the hurly–burly of running a business every day we lose sight of why we do This Thing of Ours. Here’s a three-step process for eliminating the things that get in the way and focusing on what’s valuable.

What Do I Know How to Do?

All too often the entrepreneur has a hundred ideas for making money, but no clear idea of how to actually make it happen. A good starting point is figuring out what abilities you, or your organization, have. If you attempt to develop a new product or service – or even a whole new business – and don’t have the necessary skills, you’ll put undue stress on yourself and your people. There really are a million ways to make a buck and you’ll be more successful if you stick with what you know.

This doesn’t mean you can’t do new things. Just don’t overdo it. Make sure your current business is on solid footing before going off in new directions. And, don’t try too many at one time. Focus!

Can I Make Money Doing It?

Just because you can do something doesn’t mean you necessarily should. You might be a highly skilled buggy whip maker, but I doubt you’ll build a successful business in buggy whips.

Ask yourself a few questions:

• Are there enough people willing to pay me enough to make a profit?
• Is the competition sparse enough for me to carve out a place?
• Does my intended market have legs? Or is it a fad?

After figuring out what you can do and what you can make money doing, you have one more question to answer:

Is it Fun?

Fun can mean different things to different people. Fun can be enjoyable or socially worthwhile or challenging. How you define it isn’t important. The fact that you are having fun, as you define it, is.

Fun is what will get you through the hard times – and every entrepreneurial endeavor will have hard times. If you get up in the morning dreading going into the office or the shop, you need to re-evaluate just what it is that you’re doing with your business.

Mark at Productivity501 uses an example of a client’s accounting system to illustrate the importance of integrating processes over having “best of breed” software.

“If you choose your solutions based on integration instead of features, you’ll increase your productivity–even if you have to sacrifice some features. If you choose your solutions based on features and ignore the integration aspect, the time savings benefits will be greatly reduced.”

My response is a hearty “Amen!” If I had a nickel for every dysfunctional work process I’ve seen I could stop working for a living and blog full time. I’ll go a bit further than Mark, though, and say that lack of integration isn’t just limited to software. Processes can break down for a whole host of reasons:

People – if you have employees who just cannot work as part of a team, the best designed work process will not function to its potential.

Physical Space – if people, or departments, who should be working together are too separated physically, communication is thwarted. While modern communication tools are great, and have done wonders for keeping people connected, there is no substitute for the regular, spur-of-the-moment face-to-face contact.

Strategy – by this I mean the lack of communicating the strategy to your people. It doesn’t matter if it’s because a strategy doesn’t exist or because you don’t communicate that strategy to the rest of the organization – if your people are making decisions in a vacuum they won’t all be on the same page.

These are just off the top of my head. I’m sure there are plenty of others. Care to add your two cents?

One last bit of wisdom from Mark:

“A well designed integrated process with average tools is much more productive than the best tools, but no integrated process.”

I had a conversation the other day with a client in which he was lamenting his difficulty in securing supply. This client takes a partially manufactured item and processes it into a completed specialty item for sale.

Making the partially completed part takes millions of dollars in equipment and the industry is dominated by large ($100+ million ) organizations. The specialty business my client is in consists of small companies with annual revenues between $500,000 and $1,500,000. Since the large suppliers are going after mass markets, supply for the specialty items has been problematic since the beginning of time.

My client has done a better job than his competition at securing supply, but he still spends a great deal of his time on the effort. As we were talking, it hit me that THIS is his competitive advantage. Doing the difficult thing – the thing nobody else can do.

It made me think that just about every business has something difficult, something that can be marketed and delivered, that can separate them from the competition.

The software company that spends the time to make the interface intuitive.

The landscaper who sweeps up the clippings instead of spreading them around with a blower.

The appliance repairman who shows up at a specific time, not within a 4-hour window.

The blogger who posts something worthwhile every day. (I’m not above preaching to myself.)

What difficult thing can you do to distinguish your company in the marketplace?

The folks over at FreelanceSwitch have a slick Freelance Hourly Rate Calculator. I say slick, because it’s a nice piece of software, but I think it gets the order of things backwards.

It’s actually pretty common for small businesses (and consultants and freelancers) to attempt a cost-plus approach to setting prices. It’s easy to add up all your costs, put in a profit percentage, and voila!, you have the price you want to charge. Unfortunately, the real world doesn’t always co-operate.

The price you can charge your customers is limited on the upside by “value” and competition.

Value is a slippery concept, but even if your customer doesn’t have a firm number in mind, they do have some notion of what your product, service or time is worth. Whether or not this is enough to cover your costs is of no concern to them.

Think of it this way: if a prospective client approached me to do several months’ worth of backlogged bank reconciliations and I quoted them a rate of $175 an hour, I doubt very much they’d engage me. Bank reconciliations don’t have a “value” of $175 an hour.

Which brings up the second price limitation: competition. The prospective client could certainly find someone else to do bank reconciliations at a much lower hourly rate – maybe $20 or $25 an hour. Even if they’re not as efficient at bank recs as I am, their total cost will still be much lower.

So, your price is limited by both the value of the product or service AND by your competition – you get the lower of the two.

But, maybe your value is very high and you either don’t have much competition or they charge high prices. Why would you want to limit your income to some cost + profit level when you could possibly charge more?

I can see two bad results from using the cost-plus approach. Either you price yourself out of the market and don’t get enough business, or you underprice yourself and leave money on the table. Neither one is a good result.

That doesn’t mean I think the calculator is a bad thing. It’s a useful tool to see if the prices you plan on charging are enough to cover your expenses. If not, you need to rethink your business.

Hat Tip: Lifehack.org

New articles for the May edition of SCFO Monthly are posted. You might find either OODA Loops Don’t Get Soggy In Milk or Somtimes You Have To Fire A Customer of interest.

Every month I’ll write two or three articles of interest to small business owners and the people who advise them. If you’d like to receive the newsletter via email, here is the link to sign up.

Rob at Business Pundit has an interview with Laurence Haughton, co-author of It’s Not The Big That Eat The Small…It’s The Fast That Eat The Slow.

You should read the whole interview, but here’s a taste:

Speed just keeps gaining momentum (as a competitive advantage). Why? Because:

1. Slow costs more. Every minute we can take out of manufacturing time, stocking time, get-to-market time, and customer response time saves us money and makes us money.

2. Speed is the ultimate customer turn on. Everyone is short of time. We hate delays, long lines, out-of-stocks. We love finding what we want and getting back to work (or play) fast. And we’ll pay for speed.

3. Speed is the one advantage that the big competition can’t duplicate easily. Big companies are bureaucratic, dysfunctional, and self-absorbed. They don’t listen, they are slow to change, and they kill momentum and initiative. Don’t copy them.

Rob also has a link to a free webinar that Haughton will be giving on speed as a competitive advantage.

Lagging Indicators are those pieces of data that tell us what happened. They’re history.

The most common collection of lagging indicators that business owners are familiar with are the financial statements – Balance Sheet, Income Statement and Cash Flow Statement – along with the other management and financial reports pouring forth from the accounting department.

If you’re like a lot of companies I come across that are transitioning from small business to small enterprise, you get your financial statements for the previous year in April July. So not only are your indicators history, they’re ancient history. That’s a tough way to manage a business. Read the rest of this entry »