Reacting to a Tough Economy

November/December 2001

The world economy is in a recessionary period. For one reason or another, many small and medium-sized businesses fail to react in a prudent manner. The way you react to tough times will determine if you are still in business when good times return.

When selling your business, more weight will be given to current earnings than historic
earnings. Therefore, for those who may be contemplating selling, the best course of action may be to sit tight until the business climate
and profits improve.

Your business may be your most valuable asset. To maximize its future value, there are
several steps you can take now in an effort to assure your company’s future. This is the time to act decisively and make the tough decisions that save cash and improve liquidity.

1. You can easily cut back on staying in upscale hotels and eliminate business-class travel and other perks. More importantly, however, don’t maintain other expenses simply because you want things in place when business returns to normal! Eliminate expenses now and gear up only when demand dictates.

2. Don’t wait too long to lay people off. If two employees can do the work of three, reassign responsibilities and cut one position. Employees are expensive, and recessions can last a long time.

1. Consider renegotiating debt. Delay expansion plans and keep lines of communication open with your bankers, informing them about your financial performance. Bankers dislike bad news, especially if they have been kept in the dark.

2. Communicate value over price to your customers before your competition decides to cut prices. Offer additional products and services. This will help prevent erosion of sales.

3. Tough economic times may eliminate weak competitors and provide opportunities to gain market share. Be selective in acquiring new customers. Make sure they are credit-worthy. Be wary of those shunned by competitors.

4. Get a better understanding of your company’s finances. Assume a defensive posture. Maintain margins and do not provide extended terms that may inadvertently harm your cash position. Create projections and analyze cash flow to gain a more definitive plan for your business over the next 12 months.

If you act decisively, you’ll likely survive the downturn with a larger market share and a stronger company.