Saturday, June 28, 2008

Recession Proofing Your Business

Last week, I had the privilege of being asked to participate on a panel discussion matching the title of this article. Sponsored by Entrepreneurs’ Organization (EO for short –, the panel featured three of us who were aligned with the areas of sales & business strategy, finance & operations, and personal wealth management.

The audience was filled with members of EO in Boston, and all are business owners who had various types of businesses including those that sold products or services, with some focused on consumer and others had B2B offerings. Without making this advice sound too much like motherhood and apple pie, I thought capturing some of the topics we covered would be helpful to others.

In general, entrepreneurs are far more risk tolerant than the typical business person. They have followed their dream and have “skin” in the game which usually involves personal guarantees on loans, second mortgages on homes, and an income that is entirely dependant on their personal ability to succeed.

I realize that the news media is pumping the gloom and doom of these economically challenging times. However, it is my strong opinion that small businesses can grow substantially during a business climate which is challenging for larger businesses. Additionally, entrepreneurs are almost always creating a niche business offering that meets a market need that is not being serviced by other available products and services. One of my first points during the panel discussion was that an economic downturn should not inhibit an entrepreneur’s ability to grow their business.

Here are some of the panel’s points about recession proofing a business:

Define your ideal client. This is my first piece of advice to every business that I work with, but it is very often overlooked by business owners that are “too busy” running their business to take an introspective look at the best clients for them to serve. There are a number of different measures to use, but here are a few that I think are important when you review a client relationship; the clients are profitable, offer repeat or follow-on business opportunities, value your work and are not obsessed with price, are easy to work with and respect your employees, will advocate and act as a reference for you with prospects, and they offer some name brand recognition when listed on your client list.

Allocate 90% of your time and resources servicing ideal clients. One of the best ways to drive your business into the ground is to spend too much time, money, and effort on low return activities. During an economic downturn, one of the biggest hurdles is getting over the market's gloom and doom attitude. By definition, your ideal clients are also the ones that get the most out of your services, and prospects that match your ideal client profile are the ones that are most likely to become new clients. Focus your time on serving and growing client relationships with customers that will place the most value in your offerings.

Get rid of the things that don’t work. Evaluate your products, processes, and people, and get rid of the things that are not working for your business. It is often hard to eliminate people or product lines during the good times, but when you have to look at your business with a critical eye, it might become easier. If nothing else, the people on your team will understand cutting out things that are not working during periods when the market is said to be in a downturn.

Improve your customer service. Expectations from clients will increase during times of economic uncertainty. Ironically, many of your competitors will start treating their customers poorly, or they will start taking them for granted. Either way, you can grow your market share by taking clients from your competitors through improvements in customer service. The added bonus is that better customer service will also increase the barriers to exit and you will lose fewer customers to your competitors.

Manage and lead your employees. If you have any employees under the age of 30, they have never worked through an economic down turn. During their work life, the US has had economic prosperity and the lowest unemployment rate in history, so they may not understand how to manage tightening resources. If you have employees in their 50s, they have lived through a number of slow periods, but now they are probably senior managers and earning a much higher salary so they have a different set of worries. As a senior executive, you need to manage the company as well as provide the leadership needed to motivate the team and set a winning direction.

Cash is king. Selling product or delivering services is one thing, but collecting on your accounts receivables is another. Big companies will often slow down their payment schedule during down cycles. You should make your AR department (or person) one of the most important functions in your company. Get all of your sales people and client-facing employees to understand and focus on helping to collect the money owed to you by your clients. If you can improve your days to collection by 5-7 days it will make an enormous impact on your cash flow.

Dig your well before you are thirsty – get a line of credit. If you get to the point where you need a loan or line of credit to finance your operating costs, I can guarantee you that looking for financing too late. Take your financials to a bank and get a line of credit before you need it. The credit market is tightening with the amount of write offs in the banking industry. However, banks are in business to lend money so you can always get loans or a line of credit. All bankers are not created equal, find one that understands your business and is truly interested in a working relationship. Banks make money by lending money; you just need to give them the comfort that you and your business can generate the cash to pay them back.

Don’t forget to pay yourself. When resources become limited, one of the common cash management techniques is to pay your employees and expenses but deferring your salary. Make sure that your compensation expectations are in line with the revenue and expenses of running your business, but don’t stop paying yourself. My guess is that most entrepreneurs did not start a business with the intention of creating a non-profit. You owe it to your family to be compensated for the hours you invest in building your business.

Many of these points might seem logical or simple, and that is because they are. However, don’t confuse simple with easy. Often the biggest management changes are the simple things that are extremely hard to implement. Good business sense does not go away when you’re growing a business in good times or bad times, but there is often more latitude to absorb mistakes in good times. Executing on your business plan becomes increasingly more difficult when you are leading a company in tight economic periods, but these simple guidelines can help.

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