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Surviving An Economic Slowdown For Small Businesses
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 don’t
survive, there often are telltale signs, according to John J. Keough,
director of client relations for management consultant George S. May International
“The biggest mistake small-business
owners make happens long before the first day of business - not enough
capital,” Keough says. Another common failing is not enough emphasis
on quality, both in production and in the marketplace.
“You can’t afford poor quality,” Keough says. “As
the economy slows, competition for market share gets more intense and
a shortcoming in quality or finances becomes even more apparent. But if
you’re running the business right, you’ll be prepared for
an economic downturn while your competitors are running scared.”
To help you prepare for the inevitable slowdowns, Keough offers these
1. Do not panic at the first sign of a slowdown. A downturn in your business
can be self-fulfilling because you’ve taken steps to cause it. Keep
your receivables under control without impairing your ability to do business.
2. Don’t 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 don’t 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 aren’t the low-cost producer,
you likely won’t have sufficient profit margin to expand. If you’re
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. Don’t 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
9. Don’t 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
you’re growing. If the orders you’re receiving don’t
have long-term potential, you don’t 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. Don’t 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 isn’t
all bad news, Keough says. “Every company that’s not prepared
for lean times creates an opportunity for those that were planning and
watching the numbers. It’s likely that the company that focuses
on quality and improves its business systems will emerge with a larger
John Keough is director of client relations for George S. May International
Co., a management and consulting firm.
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