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Small Business Recession Tactics - What to do in a Bad Economy

 Printer / PDF Version:  Small Business Recession Tactics

So, it is official.  We are in a recession.  Should you open a new business?  Should you be in the small business capital market right now?  The simple answer is YES! This article gives you real-time situational advice on how to be successful during a tough Economy.

Survival Planning:

Ed Hess, author of So You Want to Start a Business?  8 Steps to Take Before Making the Leap, says the first step is to “analyze why you’re in trouble, why you’re losing customers or why customers aren’t paying you fast enough.”  We can’t agree more.  You need to rework your Company’s Strategic Plan, Customer Plan and Supplier Plan to come up with a Survival Plan to cash-in on the opportunities a Recession provides. 

So how can you increase or maintain Cash Flow in a down Economy?

1)     Diversification:  Dan Leader, Owner of Bread Alone, a wholesale and retail bakery with three outlets, used diversification to maintain his $7 Million in Annual Revenue.  One third of the business is targeted on Retail Stores, one third on wholesale distributors and the other third concentrates on Mail Order and On-line Sales.  This way if one sector is hit hard in an economic downturn, the business has two other Sectors to pick up the slack.

2)     Contingency Plans:  Just like you have an Emergency Fund in any good Personal Financial Plan, you should establish an Emergency Fund for your Business.  Mr. Dennis Ceru, adjunct professor, Entrepreneurship and Business Strategy, Babson College, recommends planning for “rainy days”, putting aside 3 to 6 months operating capital and salary.  Include in your Business and Strategic Planning an Emergency Plan for cutting costs.  Another option during a down economic period is to send out invoices the day of a sale with cash discounts for early payment, say within a week.  Waiting 30 days to send out invoices, during tight times, can be a strain on cash flows.  Managing Cash during a downturn is crucial so your Budgeting Process in your Company’s Strategic Plan is vital.  Other strategies could involve leasing verses buying or hire part-time labor verses full time employees.  You just need to survive until things turn around, and you can implement recession strategies.

Cost Management:

Cost and Cash Management is crucial during tough economic times.  Here are some great Recession strategies to employ:

1)     Expand you business into profitable areas without needing additional capital:  Dan Leader of Bread Alone, a New York wholesale and retail bakery, sets aside one to two days a week to make sales calls on new customers that have multiple locations, which can yield $100,000 in annual business.  Mr. Leader presented new product offerings to Whole Foods, Zabars and the like which generated a surge in large orders.

2)     Weed out Costly Customers:  Analyze your Customers’ profitability, create a “perfect customer” profile and concentrate on that customer type.  This will help you to be more profitable on a per customer basis, which is much less of a strain on Company cash flows during hard economic times.  Concentrate on higher net profits per customer verses high volume sales with less profitable customers.

3)     Examine your Technology Costs.  Technology is key to running an efficient business but make sure you only have what you need for a good price during recessionary periods.  Heavy technology costs are hard to justify when you are fighting to retain and gain customers.  After analyzing the effectiveness and necessity of available technology, negotiating the terms of delivering the technology which can be met and sustained by your company.  Low cost per acquisition unit, high unit profitability and platform flexibility are key factors to keep in mind when assessing your Technology Plan.

4)     Poor Employee Performance during tough economic times can’t be ignored.  Ensure you have a suitable Performance and Control Mechanism in place to proactively manage your human assets.

5)     On the flip side, retain your talented people even though they may be expensive.  Experience prevents mistakes, which can be very costly.  Your most expensive employees to hold on to should be your most productive ones.  They can pick up the slack during company cut-backs.

6)     Analyze the payoff of your Marketing Dollars.  What specific strategies are paying off?  At what profitability?  What is the ratio between marketing dollars spent and the resulting unit/customer profitability?  Exploiting your high profitability areas and refrain from generalized Marketing Strategies.  Analyze your Marketing Plan to determine the best target, niche markets and the most profitable methods of selling to those targets.

7)     To retain those highly talented, skilled, experienced people in recessionary times, you must continue to offer good benefits.  Don’t cut your benefits to save on costs and expect your best people to stick with you when things are tough.

Chris Pentilla’s Article, “Employee Benefits in Today’s Economy”, in the January ’09 Entrepreneur Magazine, gave good tips in retaining key employees:

ü  Provide Breakfast at Staff meetings

ü  Lunchtime training Sessions

ü  Presenting employees CASH bonuses for meeting company goals

ü  Employee cost-shared in-house day care

ü  Matching Employee 401(K) Contributions even during business slow periods

ü  Company principals tell the employees the Truth, sharing information about the Company’s Budget so Employees understand how they can positively affect the bottom-line.

ü  During tough economic times a business owner may have to scale back perks but do it with the involvement of company employees

ü  Understanding how employees will react to changes in perks or benefits is key to a good Company Communications Plan

ü  Offer Discount programs on a range of consumer goods for employees to offset benefit cuts the company has to make, such as having to increase the Co-pay on an Insurance Policy

ü  Make a strong link between Perks and Performance:  Work flexible hours; work-life balance initiatives; work at home, telecommute; and giving more responsibilities to a high achiever are some ways a Company can offer performers unique perks which they have earned

ü  Mentoring and training programs

ü  Recognizing Volunteer work and endorse a company-wide volunteer event or cause

ü  Strong ties with the Community

ü  Gas discount cards

Across the board Cost Cutting is a desperate measure.  Effective Cost Management should be a day to day tool you employ in your Company’s operations.  When times get tough, the Cost Management System you have in place will pay off large dividends, while making you very profitable during boom times.  Cost Management should be an integral part of your Company’s Strategic Plan, Product Development Plan, Marketing Analysis and Strategic Plans. 

With effective Survival and Cost Management Plans and Systems in place, your Company will be well situated to cash in on the limited availability of Business Capital in the Lending Marketplace.  Tough economic circumstances really tighten lenders’ purse strings, so it is important to concentrate on Funding Strategies which can be successful in such conditions.

Finance:

During tough economic times, Finance is a huge challenge for business owners.  In the “Going Forward” section of the January ’09 Entrepreneur Magazine, Mark Hendricks quotes some sobering statistics:

Ø  During the Second Quarter of ’08, 65% of bank senior loan officers stated they recently tightened lending standards for small businesses.

Ø  In August ’08, 49% of business owners reported cutting back and by October that number grew to 69%.

Ø  Sales Growth for businesses in all sectors fell from an 8% average increase over the last five years to 6% for the year ending October ’08.

Our best advice to meet the challenges is have a well developed and implemented Business Plan and Financial Strategy which proves your Cash Flow Model and determines which financial sources and structures fit that Model.  With your Funding Business Plan, Loan Package and Investment Overview in hand, here are some real world funding options and strategies to consider when Lenders’ purse strings become increasingly hard to access:

1)     Networking:  Increasing your Networking activities through morning executive breakfast events, trade associations, Chamber of Commerce events and Rotary/ Kiwanis/ Lions Groups can be a great way to find suitable, local, private money.  Local investors are much more approachable in hard times as they have a connection and understanding to the area and your track record.  Other business owners in these groups, associations and events can be extremely helpful in finding suitable private money.

2)     Supplier/ Trade Finance:  According to Rosalind Resuick, CEO of Axxess Business Consulting, no outside party has a bigger interest in your company’s success than your trade partners and suppliers.  Having your supplier as an Equity Partner can be very advantageous when you are having difficulty making payments or want to quickly develop a new market.  The participating Equity Stake is assigned to your past trends, present and future orders.  Start-up Consultant, Joe Fulvio, suggests your Business Plan “show not only a direct return on investment, but also the value of future business to be gained”.  By making your supplier a partner in your business, the supplier is better suited to understand your Finance needs.  There can be some pitfalls to overcome when partnering with your Supplier, please see our Article on Business Funding Sources and Strategies for more details on Trade Credit and Supplier Finance.

3)     Lease Finance:  When times are tough and your cash is tightening, Leasing can be the answer.  Small deposit, lower payments and flexibility are often associated with Lease verses Buy Terms.  At the end of the lease, you can easily upgrade equipment and roll into the Lease Payments so your out of pocket costs are much smaller than a typical finance loan.  For more information on Lease Finance, please see ABC Business Consulting’s Article on Business Funding Sources.

4)     Community Bank Loans:  Amy Loera, owner of Tio’s Mexican restaurant chain, was denied at nine different banks, for a loan to open a new restaurant, although she ran a very successful business.  These Lenders cited the Nation-wide downturn of restaurant sales due to the current recession as the chief reason for the loan declination.  There is no doubt a year ago, these banks would have lent to her.  Instead of throwing in the towel, Ms. Loera turned to a local, community lender, Arrowhead Credit Union, and she was approved for a $643,000 loan.  What was the difference?  The Credit Union was based in her business region, and she could make a strong case for the health of her restaurant chain.  Reasons Ms. Loera cited for her success in obtaining her expansion loan:

ü  Low overhead costs

ü  Reasonable Prices

ü  Family-Style restaurants picking up the slack from people by the Fancier establishments in the area.

ü  Smaller, localized lenders are typically in better shape during an Economic Downturn

ü  Community Banks are more cognizant of the local economy’s health and vitality

ü  Larger/ Regional/ National Banks are more reliant on Credit Scores and cookie cutter Applications.  Local Banks rely more on a Business Plan.

ü  Niche Market:  Suburban market that likes an affordable meal at the end of a busy day

ü  Historical Financials showing track record

ü  Debt-free

ü  12 month Realistic Projection for the new restaurant

ü  Comprehensive Business Plan; every detail about the business

ü  Received approval from the Credit Union due to:

§  Experience

§  Existing locations cash flowing well

§  Affordable meals in a recessionary environment

§  Detailed, well-thought-out Business Plan

              The Inside Story:  What the Local Bank Looks for:

§  Not Credit Score Driven

§  Look behind the scenes of the business

§  Cash Flow is Key:  An important indicator of the ability to pay off the loan.

§  Believable, forward-looking Cash Flow Projections for the new business.  Realistic Financial Statements.

§  Provide Best & Worst Case Scenarios on your Financial Projections

§  Small, Community Banks assess a business loan on a case by case basis.  This is a huge advantage over Regional Bank Loan decision making, especially, in an economic down-turn.

§  In recessionary times, certain industries will be hit harder than others, like Construction Companies or Auto Dealerships; therefore, it is very important to have a well developed Business Plan and a forward looking Strategic Plan that includes a well researched 12-18 month industry outlook, based upon a believable Marketing Plan.

§  Small Bankers can see successful pocket areas in a struggling local economy.  These pocket areas often have a Strong Niche Marketing Offering

§  Financial problems are best disclosed to the bank early on so a mutual solution can be implemented

§  Small Banks do loan to Companies showing past financial “hiccups” if they can show they were proactive and overcame the issue

              Top Ten Businesses in a Bad Economy

              According to One Coach…….

1)     Business Coaching

2)     Business Networking

3)     Alternative Fuels

4)     Environmental Services

5)     Health Care

6)     Nail Salons

7)     Discount Retailers

8)     Luxury Products

9)     IT and Technology Services

10)  Credit and Debt Management

As a Business Consultant writing this article, I agree with items #1-5, 7-10.  But I take exception with #6, Nail Salons and #8, Luxury Products.  In this economy, the associated Market Niches have moved away from these two types of businesses, the consumer in the niche becoming more self-reliant.  When things get better in the economy, then it makes more sense to open these businesses.  We believe the lag time to this particular Recession is going to be about 3 years.  That is an awfully long time to carry a business without profitable Market Niche.

Item #9 in my view should be ranked higher in the list as businesses utilize technology to become more efficient and profitable during tight, recessionary periods.  #3 and 4 are great forward looking businesses, but they carry a premium and subject to positive government policy and regulations.  Just know you need to be prepared for the long haul with Alternative Fuels and Environmental Services as demand will ebb and flow directly associated to the whims of the White House and Congress.  In addition, during down economies, you will need to aggressively sell how much these businesses can save consumers and businesses money in a significant, quantifiable way, since the offering will be products and services that carry a price premium.

Some areas which Sara Wilson keyed on in the referenced December ’08 Entrepreneur Magazine Article which makes a lot of sense in this Economy:

1)     A Business Idea that is Working right now:  CouponMom.com

a)     Stephanie Nelson started a website that teaches consumers how to save money buying groceries using coupons.

b)    2008 Revenue has doubled and the site had over 1 million unique users in July.

2)     Local Scope:  Due to financial pressures and an uncertain economic outlook, consumers are spending more time at home and closer to home.

a)     Consumers are frequenting local restaurants and entertainment establishments, which are more low key and less expensive.

b)    Instead of traveling to Disneyworld, families are utilizing “staycations”, enjoying local area parks, lakes and beaches.

3)     Green Business:  Organics are and have been exploding in growth and the outlook is very good.  People want to eat healthy and feed their family healthy food even when things are tight financially.

4)     Web Business:  Why spend large start up dollars on a brick and mortar Business, when you can run the same or similar business from home, utilizing the internet?

a)     Web businesses are very competitive and the learning curve is significant if you aren’t familiar with web marketing techniques.  Please read ABC Business Consulting’s Article, Online Marketing Strategies, for more information on starting and running a successful web business and company website.

Sara Wilson had another good article, “How are Franchisees Dealing?” in the January ’09 Entrepreneur Magazine that interviewed four different franchise business owners on how they were dealing with obstacles during this current economic slump:

1)     Floyd’s 99 Barbershop:  The franchisee, Jay Palmer, couldn’t find a loan for a new store.  He tried using his home and his parent’s home as collateral and no luck with banks, including trying to obtain an SBA or Corporate loan.

Ø  The Solution:  Mr. Palmer found a personal investor (Angel Investor).  The investor came into the shop for a shave and a haircut when Mr. Palmer wasn’t around so he could get a good feel for the business.  He ended up investing $150,000 after seeing a steady stream of happy customers and happy, energetic employees.  This was a great move on Mr. Palmer’s part, using a track record of success and clearly showing a sharp investor the real deal behind the potential success of his future business opportunity:  great service, great product, happy customers and content, energetic employees.  In just one site visit and the positive experience with the business’ services, the investor was ready to supply the needed capital even after multiple bank turn-downs.

2)     Kitchen Solvers:  Franchisees, Carrie and John Borden Kircher, customer niche based changed.  Their customer market became price orientated, and the business offers premium kitchen and bath remodeling.  Leads dropped 19% and sales are down 25% over the last two years.

Ø  The Solution:  Their solution is rebrand their vans, get new signs; increase letters to past customers; leave a gift with a customer after a job is complete; and working with their franchiser on the operational side of the business.  Ok, as a Business Consultant I am going to give my two cents on the Borden Kircher’s proposed solutions:

§  Rebranding Vans and New Signage:  In my experienced opinion, this is a waste of money.  I would instead spend this money on a new Marketing Plan which concentrates on two areas:

ü  How to target higher wealth clients in the market area.

ü  How to sell price based customers on why premium services and products can save them money in the long run.  Once the new Marketing Strategies bring in profits, then it is a good time to upgrade signs and re-brand with those growth dollars.

§  Increase Letters to past clients:  Ok, but what is the purpose of a letter?  The time to ask for referrals is the day the job is completed.  When the client is happy with their new Kitchen or Bath.  A newsletter with examples of completed jobs and customer testimonials, along with a preferred customer discount coupon, may be more effective in obtaining an add-on sale with an existing customer.  A newsletter can also be a forum to introduce other services to current customers which they may not be aware, such as, having an article on the Design Services that Kitchen Solvers offers.  The most cost effective, normally highest bang for your marketing buck, are continuing sales to existing customers. 

§  Leaving a Gift Basket with a Customer Post Job Completion:  The Borden Kircher’s are looking to implement better customer service and they believe customers are looking for the “Wow” factor.  Leaving a gift is not customer service, and the wow factor should be as a result of a beautifully completed job.  A Gift Basket will get neither.  Customer Service starts at the Sales and Design Stage and continues throughout the job.  The business owners showing up on the job to check on things and talk with the client is good customer service.  Meeting with the customer in person after a job is completed to go over everything and ensure the client is happy is good customer service (and a great time to drop off the latest company newsletter and ask for several referrals).  Customer Service is showing up on the job when the client is unhappy with the contractor’s work.  This type of highly motivated customer service will create the Wow factor for Kitchen Solvers, along with a quality, premium, beautiful look in the finished kitchen or bathroom, leaving a lasting impression.

§  Work on the Operational Side with the Franchisor:  This is one of the fantastic advantages a Franchisee can leverage:  utilizing the experience and resources of the Franchisor.  Some Operational Tips I would make as a Business Consultant:

ü  Analyze product costs and see where you can cut costs yet still retain a premium, high-end image with quality products and value added results.

ü  Work on a Supplier Business Plan which strengthens your relationship with your suppliers, tapping their assistance, experience, resources and expertise to bring better product offerings to your customers.

ü  As previously stated re-work the Marketing Plan, along with making the resulting key changes in the Strategic Plan to better anticipate future market trends and adapt operations more proactively to those indicating trends.

ü  Examine the Operational Aspects of the Business Plan to see how you can better bridge the gap between the design sale stage and the install.  Customers are more prone to pay a premium for a smooth, effective transition from concept and design to install and completion.

ü  Incorporate add-on selling into your Strategic Sales Plan for existing customers.  A happy customer is more apt to stick with the same company to continue remodeling, so be sure to have a built in process which engages customers and shows them other remodels you can accomplish for them.  Add-on selling takes very little marketing cost for a big return and ties in well with solid customer service.

ü  Have the Franchisor witness some sales and installs to see if areas for improvements can be identified.  Incorporate these improvements into your Business Plan.  ABC Business Consulting Resource:  See our Franchising article for more information.

Ø  My Best Advice:  Find a way to sell a premium product and service to higher wealth clientele and offer a product/ service which has a premium look and finish, yet appeals to price conscious customers.  Search for innovative suppliers who can help accomplish this mix.  Follow-up this new business model with strong customer service throughout all the sale and install stages.  Concentrate on a post-completion walk-through which asks for referrals and start the add-on sale process.  Follow up with a monthly newsletter which contains add-on ideas and offers a loyal customer discount.  The Borken Kircher’s have a lot of challenges in this economy, and as they said, “you can’t just sit around waiting for people to call.”  Use this rough patch as a learning experience in staying ahead of changing market trends, analyzing costs and making new plans for future success.  A premium product + great customer service + a quality install + great value = a viable business model in any economy.  Just don’t wait two years to make changes.

3)     The Melting Pot Restaurant:  The challenge Franchisee Michael Frampton was facing during the Real Estate Crash in California was establishing the restaurant in a new shopping center when 10 other centers in the area were all opening at the same time.  On top of this significant challenge, property taxes went up from $500 a month to $2,500, which meant $2000 a month cost comes straight off the bottom-line, never being budgeted for.

Ø  Solutions:  Mr. Frampton shows why he is going to be a successful business owner.  Clear steps and strategies to overcome the current situation:

§  Loyalty Cards:  This is a fantastic move.  Appreciate your regular customers during the hard times, and they will keep your doors open.

§  Mass Mailing:  Targeted within a 10 mile radius as there are so many competing restaurants in the immediate area.  Targeted mailing is measurable, which is key during tough times.

§  Analyze where you are spending money and the areas which can be controlled (not necessarily cut):  Mr. Frampton actually saved $500 a month in focusing on linen costs for towels used to clean the restaurant.  He also analyzed energy cost:  when they turn on equipment and the length of time it’s used.  A third major cost area for restaurants is staffing, which Frampton cost analyzed as well.

§  New Business Opportunity:  He started opening for lunch on Sundays.  Why?  Probably because customers come after church with their families to enjoy an upscale meal, as do the late weekend risers searching for a good brunch close to home.  One of the best analyses a restaurant can perform is looking at the average customer flow, food sales, alcohol sales and costs for each day of the week it is open to determine what days are best to be open and the reasons why.  Armed with that information, you can adjust staff schedules, open hours and food prep costs much more strategically.  Mr. Frampton apparently thinks the added costs of being open for lunch on Sunday is worth it, based on good cost analysis. 

4)     EmbroidMe:  Wendy and Todd Diskin own a franchise that specializes in promotional solutions for businesses, which includes decorating apparel and screen printing.  Their challenge has been rising costs from their suppliers.  They have experienced a 5% increase in the Cost of Goods over the last year.

Ø  Solutions:

§  Competitive Pricing vs. Solution Based:  The custom product industry is price competitive.  With rising costs, the Diskin’s have provided a more solution based approach so the buying decision isn’t just made on the quote.  For instance, if one of their customers is trying to increase readership, they figure out how EmbroidMe products or services can help the client achieve that goal and come up with a program to do so.  Then the decision becomes one of “risk and reward and ROI instead of price…”  Selling solutions alongside your product and service offerings is a way you can separate your company from the competition and still retain premium pricing in a price based market. 

§  Continuous Marketing Software:  This program sends letters and emails so the Diskin’s can “stay in front of their customers on a regular basis without a ton of effort….”  This software program keeps the company engaged with customers, giving EmbroidMe first opportunity to make another value added sale or track how customer market trends may be changing. 

§  Vendor Relations:  Leveraging a strong advantage franchises have, EmbroidMe Corporate negotiates the best pricing and strategic relationships with suppliers for their franchises.  This is a huge advantage as it is a time consuming task and volume pricing from a Global Corporate level is much more advantageous than negotiating on your own as a single business unit.  So it is apparent that although COGs has risen, EmbroidMe is still very competitive and successful, even in a recession. 

Conclusion:

This article used real world examples from articles in the Wall Street Journal, Investors Business Daily and Entrepreneur Magazine and combined it with the business experience of a 20 year veteran Business Consultant to provide you with real world examples and strategies to use in order to start, run or adjust a new or existing business in a struggling economy.  Survival Planning is a must and utilizes good Strategic Planning, Diversification Techniques, Contingency Planning and Cost Management.  We discussed various Finance Techniques for your business which are particularly good during a Recession, which include Networking, Supplier Finance, Lease Finance and Local Business Loans.  For more detailed information on Alternative Finance Strategies for Businesses, please refer to our article, Funding Sources for your Business.  To conclude the article, we identified certain types of businesses which excel in an Economic Downturn and why they are successful.  Our best advice for starting or operating a business during Recessionary times is as follows:

1)     This Recession will have an impact for at least 3 years.  So keep that in mind when planning for your business.

2)     Track record, Experience, Niche Market Identification and Cash Flow are keys in raising funds for your business.

3)     Solid, Comprehensive Business Planning, along with realistic, accurate Market Planning and Financial Forecasts are very critical during challenging economic times.  An effective Strategic Plan is integrally important in bridging the gap between a Marketing Strategy and Realistic Financial Forecasting. 

4)     Out of the box thinking:  For Brick and Mortar Companies, key on strong local areas and/or utilize the web to efficiently bring a product or service to the market.

5)     Price Competitiveness becomes less important if you sell value-added business solutions to your customers and have tight controls on costs. 

This article was written the ABC Business Consulting Business Success Consultant, Frank Goley, who has many years experience helping companies start, grow, turn-around and succeed.  Please visit The ABC Business Consulting Website for more information on what a Business Consultant can do for your Company.

This article references the following Wall Street Journal, Investor’s Business Daily and Entrepreneur Magazine Articles:

1)     Wall Street Journal – Small Business Section:  11/11/2008

“Small Firms Get Local Loans” by Anjali Cordeiro

“Small Talk:  Questions about Entrepreneurship” by Kelly Spors

“How are Franchisees dealing?” by Sara Wilson

“Employee Benefits in Today’s Economy” by Chris Pentilla

2)     Investor’s Business Daily:

“Small Firms:  Stacking the Odds in a Crisis” by Gary M. Stern

3)     Entrepreneur:  December 2008/ January 2009

“Smart Moves in a Bad Economy” by C. J. Prince

“Advisor:  Seeking Investors” by Rosalink Resnick

“Trend: Economy” by Sara Wilson

“Crappy New Year” by Mark Hendricks

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