Friday, January 2, 2009

Innovate to Survive and Thrive

Every business owner can learn from and improve their business from the example of the US economy. Please allow me to explain: When an economy is in a recession, it experiences negative growth. In other words, it gets smaller instead of bigger. Even just a little bit of negative growth can cause significant turmoil, as we are seeing in today’s economic environment. The same thing will happen to your business if you shrink.

When a company’s revenues start to decrease, it quickly finds its Break Even point – which means that the gross margin is barely enough to cover the fixed costs of the company. For smaller firms, this often means the owner no longer can take home enough compensation to pay their personal bills.

In order to survive its shrinkage, the company has to look at cutting back its fixed costs, but that will usually be expensive and often disruptive enough to hurt the firm dramatically. Usually the five most common fixed costs in a business are payroll, rent, advertising/marketing, fixed asset costs (depreciation, interest, repairs maintenance), and insurance. There may be some excess in these areas, but any major cut-backs in these areas often cause a lot of problems and can hinder the company’s chance for survival. I will avoid discussing each of these fixed costs now, but that may be the topic of a future blog.

So what does all of this mean? Rather than accept shrinkage, it is time to find new ways to grow. The companies that thrive through this recession and then position themselves to really grow when the economy turns are those who aggressively innovate through this time. Is it painful? Yes. Could it cost some money? Yes. Will it consume time and resources? Yes. Will it be worth it? Don’t take my word for it – do it and then let’s see what your financial statements say when the economy turns.