Widget makers, service providers and every form of small business share the same pain – an economy that shows no mercy. By most accounts, the Great Recession is about to enter its fourth winter and its impact has been far-reaching and significant. The ability to survive this downturn is becoming increasingly challenging for all businesses.
The formula for surviving an economic back-breaker like this is simplistic, but not without its troubles. For many businesses, the answer rests with a company's ability to increase its cash flow. Although this makes sense, there really are five options a business pursues to help stem the tide of diminishing profits. Cash comes from five essential sources:
1.) retained earnings
2.) an infusion of capital from the owner
3.) the availability of bank financing
4.) decreases in costs to operate
5.) increases in sales.
The first of the cash-is-king remedies centers on the issue of retained earnings. It takes money to make money. This old adage may be an idiom, but don't discount its accuracy. Long-standing, successful businesses achieve such tenure because they know their market and how to make money. Their operational practices allow them to make more money than most when the economy is good; and to lose less money than most when the economy is bad. The retained earnings a company keeps in its coffers are beneficial when economic downturns come to town.
The second remedy depends on the business owner's tolerance for risk. For many business owners, the idea of being prepared for an economic downturn is like telling your child to save his money for a rainy day; it won't happen. The average business owner burns through cash when they have it, often giving no credence to the possibility their company may need a cash infusion. The problem in today's economy is that too many baby-boomer-aged business owners have already seen their retirement accounts take a beating in a volatile stock market, so they are growing increasingly reluctant to risk more money.
The third remedy for solvency involves finance capital. When business owners need cash, most rely on their local banker for revolving or term loans. Although financed capital is the backbone on which the American small business market has grown over the years, the rules of engagement have drastically changed. Yes, capital is available, but not under the same terms as have been offered over the last several years. We are now back to 'traditional' financing. You need 20 percent down, solid cash flow, and your operating ratios must be within the required ranges. With new banking laws and the collateral damage caused by the current economic downturn, you need to be bankable to get cash.
The fourth option is a reduction in operating expenses. The greatest positive, short-term effect on cash flow during a downturn rests with the business' expenses. As is the case with almost every company, the longer the business is in business, the greater its cost creep. In short, the cost of operating a business tends to creep up each year because the owner presumes the company is efficient and its costs to operate are always the lowest they can be. This expectation does not often prove to be the reality of the situation. A company should spend as much time limiting its expenses each year as it does trying to raise its revenues.
And finally, the fifth area of focus is on sales; increase sales and profitability is sure to come along. Conventional thinking has us believing revenue drives the success of a business. Although it is a function of a business' success, it does not stand alone. In an economic downturn, the science of increasing sales should not be based on anecdotal evidence. You really need to match your product or service to your market. Often, how a company drives its sales is more a function of historic practice and not an evaluation of pertinent data. Think about it: in a market like this, how successful has your gut feeling been?
If you're like most business owners, your initial response to jump-starting sales is to try harder. You might hustle to hand out a few extra fliers, make a few more phone calls or pump more dollars into your marketing budget. Maybe you try the age-old idea of having a 'sale.' When the average consumer is being as picky as they are in this current economic downturn, 'sales' are the norm and you are not going to find sustainable success using this tactic.
Here are a few options to consider when sales go flat:
Clicks not Bricks
If you have not noticed, electronic delivery is the new normal. News, entertainment and personal communication are electronically based, and for good reason. The Internet knows no bounds. It brings people, products, services, interests and abilities together. This platform offers incredible options, and at costs that make traditional advertising and sales truly obsolete. But understand, the process of going electronic is not without challenges. Take some time to understand the options, match these to your company's ability, and dare to join the 21st century.
Strategic Alliances
Jump-starting your sales may be possible by getting in front of a new legion of customers. Joining forces with a complementary, non-competing small business may prove a great way to grow sales. Cooperative relationships allow your business to work outside its current sales platform.
Trade Shows
Trade shows put you in front of thousands of buyers. Booth or sponsorship opportunities may be a great way to locate a high concentration of prime customers. But don't do it like everyone else; dare to be different. For instance, don't go to an apparel trade show if you sell uniforms. Attend an industrial or housekeeping convention. Don't be like everyone else; look for places where your services and products fit in, but at the same time, stand out.
Specialize
In a down economy, everyone wants to sell everything to everybody. Although this may seem contrarian, try specializing. By specializing in what you do, you take your wide-scoped business development plan and make it laser-pointed. You focus your product or service to a select audience that is in the market for what you do. This option does not fit every business, but it does fit those who have streamlined their operations, narrowed their operational costs, and truly understand their market and the appetite the market has for select service or products.
In the capitalistic society of America, the laws of supply and demand hold true; only the strong survive. If you are a small business owner, any continued hesitation in fixing what ails your company is suicidal. At a press conference on Nov. 2, Federal Reserve Chairman Ben Bernanke spoke about the downgraded outlook for economic and labor conditions in the U.S. over the next two years, calling the recovery process "frustratingly slow." Now that should be incentive enough to spur business owners to take action.
David Saint-Onge is president and principal strategist for Black Ink Assets, a business consulting company providing organizational assessment and performance enhancement services, business growth and sustainability implementation strategies, computer information technology consulting, and formation of exit strategies and corporate transition plans. David is also the author of Built To Fail - How Uncertainty is Killing Intuition, Invention and Investment in American Small Business
, and The Exit Equation - How to Leave Your Business with Your Money and On Your Terms
, which is set to be published in early 2012.