10 Ways to Risk-Proof Your Company for the Coming Downturn

Every small business owner is on the edge of his seat.  While most of the news is a depressing backdrop, I don’t think it’s the financial crisis with European banks, the sovereign debt crisis of European countries, the see-saw of the stock market, or high unemployment rates.   It’s much closer to home.  It’s mostly about the pressure from customers to lower price, it’s the difficulty of securing additional bank debt for their businesses, it’s the constant threat from foreign competitors, and it’s the drop in margins.

I work with a New Jersey warehousing company, and their clients brought in tons of holiday goods.  But they aren’t shipping.  Consequently, they have the two edged sword of no processing revenue with jammed isles which lowers productivity.  It’s a scary sign that retailers aren’t releasing goods that they committed to!

We are all hearing announcements of encouragement from our political leaders, but these are more than offset by a frantic Ben Bernanke pulling new tricks out of his bag each month.  His statements about long and lingering aren’t helping.  Owners also fear it will become self-fulfilling; like when big business hears about the threat of a recession and lays off a big chunk of their sales force.  They expect customers to retrench, lower inventories, slow down capital expenditures.  For good reason, the small business guy is concerned about the future.

Whether it’s a mild dip or a protracted recession, things don’t look good.  Here are 10 ways that you can reduce the risk of failure in the coming years.

1). CASH IS KING – How many times do you have to hear this before it sinks in?  THE single most important strategy for the comingyears is to conserve cash.  The last thing you need is to plan some ambitious program that will need cash when the recession hits and your numbers drop.  I have a client that is struggling to complete a major renovation of a building while margins and profitability are under pressure.  Avoid the stress in the future, save those Shekels now!

2). SHORE UP LENDING RELATIONSHIPS – this is the time to increase availability.  Put together a professional presentation of your performance and meet with your bank.  Remember, it’s not about the rate; it’s about availability and the amount you can borrow.  Even if you have an unused line fee, it’s worth it to have a rainy day fund to draw on.  It’s true now more than ever, banks only like to lend when you don’t need it.  Make your pitch and increase your lines NOW.

3). AVOID CAPITAL EXPENDITURES – small business leaders NEVER project conservatively for a potential downturn.  Only consider a capital expenditure if you have a contractual commitment from a very credit worthy customer.  Who would have thought you could have been on the creditor end of a Chapter 11 for General Motors?  Be very conservative in planning to use precious cash flow to support any expansion of equipment or facilities.  I would rather go to multiple shifts or outsource to a trusted sub, even if it means lower profit, to avoid the exposure of high carrying costs in a downturn.  We have a manufacturer who has secured off-site storage space on a short term rental while also packing slow moving items in trailers in the yard to avoid a long term lease commitment.  If revenue drops, he just returns the space.

4). WATCH PERSONAL SPENDING – this is not the time to heap a lavish lifestyle on your business cash flow.  I would wait onthat private jet or yacht until our economy is on surer footing.  I have seen too many businesses collapse under the weight of a high spending owner.  I remember the owner who was returning from a trip on his private jet and was met at the airport by his trusted advisors and CFO to be told he was out of cash and on the brink of bankruptcy.  Hopefully, there will be a time for big spending, it’s not now.

5). KEEP COSTS VARIABLE – even if you are experiencing an increase in volumes, plan on keeping as many of your costs variable as possible.  Avoid any long term commitments for space.  Avoid long term commitments for workers.  Reach out and partner with temporary labor agencies, they can match commitment and training for short term engagements, or until you see the light at the end of the tunnel.  In a New York based operation, one business owner plotted his next 12 months best guess forecast of business, and graphed his minimum labor requirements.  He cut back on permanent workers during the slowest period, and then filled in with temp labor to meet the demands in the peak periods.

6). RE-ENGINEER BUSINESS PROCESSES – every organization has an opportunity to lower costs by looking at their current business processes and making adjustments.  It’s pretty easy, just grab the process owners in a particular area of your business (for example your supply chain) get in a conference room with some sticky notes, and put the steps to the process on the wall.  It’s absolutely amazing, over and over again we have spent a few hours and ALWAYS uncover steps that add no value, or create waste, or steps that managers have added to reduce defects without looking at root causes.  Remember the story, The Princess and the Pea?  So many organizations have added mattress on top of mattress to try and cure the lump.  Remove the pea!!  In an eCommerce business, we found almost $900,000 of savings in redesigning the delivery system.  And, it will not cost them a penny to implement.

7). KNOW CUSTOMER PROFITABILITY – I don’t know how any manager reacts to an owner directive, “Increase profits!” without knowing the profitability of clients or client groups.  You must figure out which customers are making you money and which aren’t.  The last thing you need in a downturn is to support your client’s P&L by operating at a loss. Once you have the information, you can sit with your management team and plan a strategy for profit with each client.  It may include meeting with clients and finding mutually beneficial ways to improve both of your businesses.  You may find relief in getting forecasts of demand so you can plan better, or you may find slow moving goods that they could sell off to free up space (converts to cash for your client), or program EDI links to data flow that can reduce headcount and errors. Maybe you can negotiate a price increase.  Or, you can partner with your workforce and find ways to increase productivity.  You must execute under the following rules; if your client is negative gross profit, fire them; if your client produces a positive gross profit and you have a new client that can use the capacity at a higher net profit, fire them.  If the client is positive gross profit but produces an overall loss, keep him but search for a replacement.

8). RAISE PRICES – if you think it’s hard to raise prices now, wait until the recession hits.  Oh boy, better to try now than hope you can increase later!  I have a series of blogs about three ways to increase prices, 1) full disclosure, 2) quid pro quo, and 3) adding value.  I have a million examples of working with clients under these three approaches that significantly increased prices and profit.  These things work!

9). LEVERAGE YOUR EXISTING CUSTOMERS – the pot of gold in most companies can be found in leveraging existing customers.  In many cases, companies miss the opportunity to increase share of customer spend.  Get out and visit your customers and really explore where you can provide additional services or products.  I have never found a CEO who wasn’t surprised at how much more business was available with existing customers.  I was working with a CEO of a small IT professional services firm.  He was developing a number of new services to reach new industry groups and I asked why?  He said because he had penetrated his customers and had to look elsewhere for his growth.  I encouraged him to meet with one of his top clients and find out what their total spend was for his services the previous year.  He thought he was their “go to guy” and doing 80-90% of their business with $500,000 of revenue.  He met with the boss and found that in 2010, they had contracted over $20 million in his services.

10). STAY ON TOP OF YOUR NUMBERS – you need to make sure you are getting accurate, timely reporting of your performance and profitability (Profit and Loss Statement), your financial health (Balance Sheet) and whether your cash will sustain you (Cash Flow Statement).  Without these basic financial indicators, it’s like watching a football game without a scoreboard.  How do you know if you are winning or losing the game??  You should also consider making select financial statistics available to your management team.  Make sure that they have the information they need to drive results.   If you are worried about their reactions from the numbers, another rule to remember; workers will always think you are doing worse than you are in difficult times and much better than you are in good times!

CONCLUSION – small businesses are NOT like large businesses.  In a recession with a drop of 5% in GDP, there are large companies like Proctor & Gamble that can count on a drop in 5% of many of their brands.  Not so for small business, as a matter of fact, a recession is a perfect time to increase market share.  Execute these steps above, and you will be positioned to steal market share away from your competitors while they figure out how they are going to sell off the big fishing boat and jettison the corporate headquarters while convincing their bank not to pull their credit lines.

Chris Carey - Forbes