Saturday, March 1, 2008

Steer Your Company Through a Recession

Headlines of "First Quarter Was a Real Downer," and "Recession is Here," highlight a major concern in our economy. Fortune 500 companies cannot avoid a shrinking economy - they will all be negatively impacted. But emerging and medium-sized companies can sometimes avoid participating in recessions. In fact, they can often grow and thrive while the "big boys" struggle.

The belief that emerging and medium-sized businesses fare poorly in economic slowdowns is: "a common misconception that is not true." Emerging and medium-sized businesses are generally nimble and can quickly adjust their strategies to maneuver through tumultuous times. They are close to their customers and are often in touch with niches and growth opportunities that are below the radar screen of bigger companies.

A recent poll of business owners of emerging and medium-sized companies estimated average revenue growth of 28% and employment growth of 24% in these recessionary times! Comparatively, Fortune 500 companies are going to struggle to repeat their 2007 performance, and most will do worse. If you are feeling the effects of the recent economic turmoil, here are a few suggestions to help you steer your ship towards deeper waters.

Cash flow is critical during tough economic times. Your working capital, current ratio, and accounts receivable will make or break your ability to cash flow through tough times. It is more important than ever to implement a three-month cash flow forecast so you are ready for both surpluses and shortages of cash.

Interestingly, the banks haven't cut back on lending to healthy and well-run companies. Interest rates have dropped significantly, which has done wonders for the cost of capital and return on equity within emerging and medium-sized businesses. Now is the time to increase your borrowing capacity with your bank while they are lending to you on your historical, non-recessionary financial statements.

Use your strong customer relationships to learn more about the needs of your customers and potential customers. A strategic brainstorm session with your team centered on your core competencies and the needs in the marketplace will usually result in the discovery of new opportunities. Innovation is often the best way to recession-proof your business.

Ultimately, you should work to diversify your customer base so no single customer accounts for more than 20% of your business. Although this may seem hard to accomplish during recessionary times, over-concentration makes you especially vulnerable to difficulties during an economic slowdown.

How will an economic slowdown affect your vendors, suppliers, and subcontractors and their competitors? Since their competitors are probably hungry for business during a slowing economy, you could easily diversify to multiple sources for each of the major and minor inputs into your business, and you will most likely reduce your pricing in the process. Be wary, because your customers may very well try the same tactic on you.

By definition, fixed costs should not change. However, some fixed costs were added to the corporate cost structure when the company was less worried about an economic slowdown. You could start by taking a hard look at these fixed cost categories: salaries, wages, automobile expenses, insurance, repairs, maintenance, travel, entertainment, advertising, and marketing. Avoid doing anything that will hinder your top-line. If your marketing campaign is responsible for generating most of your revenue, then be very careful changing that fixed cost.

Hopefully, you are not going to participate in this recession. If, however, you do, then start with these suggestions and you'll be on the path to building a more sound and successful business not only to weather this storm, but also to competitively position yourself for long-term success.