By John Keough
Next to opening the front door for the first day of business, surviving a financial lull may be the greatest challenge facing small-business owners.
With a failure rate of more than 50 percent in the first five years, small businesses fight an uphill battle from the start. Among those that donít survive, there often are telltale signs, according to John J. Keough, director of client relations for management consultant George S. May International Co.
ďThe biggest mistake small-business owners make happens long before the first day of business - not enough capital,Ē Keough says. Another common failing is not enough emphasis on quality, both in production and in the marketplace.
ďYou canít afford poor quality,Ē Keough says. ďAs the economy slows, competition for market share gets more intense and a shortcoming in quality or finances becomes even more apparent. But if youíre running the business right, youíll be prepared for an economic downturn while your competitors are running scared.Ē
To help you prepare for the inevitable slowdowns, Keough offers these tips:
1. Do not panic at the first sign of a slowdown. A downturn in your business can be self-fulfilling because youíve taken steps to cause it. Keep your receivables under control without impairing your ability to do business.
2. Donít tie yourself too closely to one customer. Many small-business owners catch cold every time the customer sneezes. While it is important to have key customers you can rely on, you donít want to be so restricted that the loss of one or two damages your business beyond repair. Look cautiously for ways to expand.
3. Get the money. Some businesses that rely on repeat bids, like contractors, sometimes are lax about pressing clients for payment. Once a contractor like this gets in trouble, they lose the ability to bond and loses even more business. Change your attitude. Get the money.
4. Convert your costs to variables. The fewer fixed costs you have, the less you can hurt by a downturn. A large manufacturing facility is a fixed cost - look for ways to farm out some of your production process. If salaries are your biggest cost, try to tie compensation to incentives. Thus, when sales are down your costs are down, and when sales are up you have income to cover the higher salaries. Other options to explore include part-time or temporary help.
5. Be the low - cost producer. If you arenít the low-cost producer, you likely wonít have sufficient profit margin to expand. If youíre spending more on something than your competitors, find out why and take steps to avoid paying more. Local bankers and trade associations are good sources of information on the status of your industry.
6. Donít tie yourself to one locale. There always are markets and industries that do fine in a downturn. Broadening your customer base will help you survive slow times.
7. Keep your inventory to a minimum. Inventory is another fixed cost. When possible, aim for just-in-time manufacturing.
8. Listen to the experts. Keep in touch with your bankers. They see the clues, such as increasing numbers of past-due loans, and can let you know when the money supply is shrinking. Suppliers are another good source of information.
9. Donít grow too fast. Rapid growth is a leading cause of small-business failure. Take a sober look at your business and examine the reasons why youíre growing. If the orders youíre receiving donít have long-term potential, you donít want to build a new factory to supply them. The best tool to schedule growth is a five-year plan. By reviewing it constantly, you can monitor costs, anticipate trends and manage administrative costs.
10. Negotiate for services. When times are bad, everyone is working harder to generate business. The same goes for legal, accounting and other professional services. Donít be afraid to ask for a better price. Just as you want to please your customers, these professionals want to keep your business.
An economic downturn isnít all bad news, Keough says. ďEvery company thatís not prepared for lean times creates an opportunity for those that were planning and watching the numbers. Itís likely that the company that focuses on quality and improves its business systems will emerge with a larger market share.Ē
John Keough is director of client relations for George S. May International Co., a management and consulting firm.
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