Making money and staying in business require the same diligence, whether the economy is booming or in the death-grip of a recession. Staying in business, and even thriving, requires that business owners:
- Manage expenses
- Maximize margins
In times of prosperity, that’s easy, the public has a lot of money, so you can get away with simply earning new customers (who have more disposable income and want to spend it) and maximizing margins (because with more disposable income, consumers are more likely to favor convenience over price). And that will work until times get a little leaner, and you find that you have to manage your expenses. Businesses that do not adopt managing expenses as a business practice during the good times, will find it much harder to implement when times get tough.
A recession is defined by economists as two consecutive quarters with a falling Gross Domestic Product. Falling GDP is characterized by reduced public spending by local and federal government, reduced capital expenditure by private enterprise, and an overall reduction in entrepreneurship.
My high school business teacher told me that economies run on two things: responsiveness or elasticity, and confidence. Turns out he was right. Consumer confidence drives consumer spending, which drives production and investment, which in turn raises more tax dollars for government to spend. When consumers tighten their belts, recessions and economic slumps follow.
There is something counter-intuitive about recessions: when the consumers have less disposable income, they should spend more. The opposite is true for the more prosperous times, but most humans aren’t wired to behave that way.
Now that economists are close to announcing that the recession is over (no, really, I saw it on the TV so it must be true) we can wonder what qualities some businesses posessed that helped them survive the last thirty months, and what qualities other businesses were lacking.
And it remains a very simple answer. Successful businesses managed their expenses, maximized margins, and built their customer base.
Most businesses, especially business-to-business operations, rely on credit of some kind. Joe Knight, co-author of Financial Intelligence, says, “The reason small businesses fail is not because they’re not profitable, it’s because they’ve run out of cash.”
It’s a simple case of managing how much flows in or out of your business, and when.
Wrangling your cash flow is probably the most important thing you can do as a business owner. Failure to do that is the reason many businesses file for bankruptcy under Chapter 11. Joe Knight’s advice is “Always focus on cash flow, because that’s where you’re going to die.”
One of the first things that successful businesses did during the recession was to look at their borrowing, and renegotiate the terms to something that, while it may be over more years and ultimately more expensive, has lower payments now. Yes, adding more debt is probably a bad idea for most businesses, but if refinancing existing debt allows you to stay in business, there’s a definite upside to doing it.
Other businesses negotiated longer periods for making payments to suppliers, while at the same time requiring faster payments from customers.
Another way that recession-surviving businesses managed cash flow was to manage how much inventory was being carried at any given time – inventory costs money, and inventory which sits on your stock-room floor for weeks has an opportunity cost which can bankrupt your business.
The least desirable expense control is always in human resources, but as orders reduced, many manufacturing businesses laid off staff, instituted freezes or cuts to pay and benefits, reduced investment in hiring and training. On the other side of things, the making money flow in side, there were a few tricks, too.
Accounts receivable factoring has appeared on the radars of more small business operators in the last two years — the highlights are that you sell your invoices for between three and ten percent less than the invoice amount. And now you’re asking why any business would do that. The answer is that for most businesses, 90 percent of an invoice now is better than 100 percent of an invoice in ninety days. And that’s if the customer pays in full. Factoring allowed businesses to get almost all of their invoices paid by a third party, and focus on doing business and generating leads rather than chasing payments. The third party chases the customer for payment.
Many sole proprietorships and partnerships cut the amount the owners were paid, and in many cases, the owners injected more of their own cash into the business to continue operating, while others moved their business into more diverse or profitable areas.
For some businesses which failed, the problem lay in the products on the shelf. Luxury items like big screen televisions were some of the first things people stopped buying. When credit became harder to get, spending $2000 on a television became something many families couldn’t justify, even if they could finance the purchase.
Lessons have been learned over the last few years. Businesses have become leaner, more efficient, more productive. What’s certain is that businesses and consumers have changed the way they spend their money, and in the economy that will emerge in the next 12-18 months, things will be different.
Ultimately, paying close attention to accounting, business ratios, and analyzing which types of spending give the best return on investment are the tools to navigate the waters of a staying in business, whatever the economic climate, but the tasks the tools are used for are managing expenses, maximizing margins, and retaining and building the customer base.