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Practical. Applicable. Inventive. |
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Hill Management Consulting |
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Keeping Your Business Healthy During Economic Downturn
Note: This article was originally written in October, 2001, immediately following the tragedy of 9/11 and prior to the economic recovery in 2002. As we prepare to head into another recession, generally predicted to start by the beginning of 2010, the advice remains important and pertinent.
There is no doubt that these are troubling times. We are a nation in mourning. Our economy has weakened. We are unsure what a “normalcy” is, and yet we are encouraged daily by economists, business and political leaders to return to it. We have businesses to run and employees for whom we feel responsible. Many of us feel at a loss regarding how to not only protect our businesses, but also grow them for future profitability.
Our economy has been through numerous cycles of weakness and strength, and those cycles will continue far beyond our lifetimes. It is true that there is much we do not know, but there is a wealth of information regarding how to sustain and grow a business during difficult economic times. It may be tempting to focus on the unknowns right now, and we have plenty of support from the news media to do just that, but it is not healthy to do so. Many companies are already in the process of cutting costs, cutting staff, and reducing marketing expenditures. But by cutting costs, staff and capital spending, we actually create the downturn we feared — it becomes a self-fulfilling prophecy. We might save money in the short run. But if we lose the talent and the investment we need to remain a viable business in the long term, then we are left with a demoralized, weaker organization with which to ride out the economic crisis.
You already know the methods for reducing costs, and frugality at any time is admirable. Analyze your business and see if there are unnecessary expenditures you can cut back. Reducing costs of office supplies, eliminating time wasted, reducing energy bills, and carefully managing your payables and receivables are all smart business strategies. But you can do more than just survive during a slowdown! Here are some positive strategies you can employ to ensure the health of your business both now and in the future.
Have a Plan. It is more essential than ever that you have a sound business plan and follow it. One of the most inspiring things we can do for our business and ourselves is to take control, and making a plan is a first step to taking control. But a plan is not the same thing as a budget. Development of a business plan requires that you start with Desired End Results. Ask yourself the question, “What will it look like when my business is successful?” Develop some specific goals that, when reached, will ensure your business succeeds. These goals could include specific revenue levels, specific profitability measurements, or a growth percentage.
Once you know your long-term goals, establish short-term goals that will ensure you reach them. For each short term goal, develop quantitative and qualitative measurements that you will check daily or weekly to monitor your progress. For example
Establish 2-4 long-term goals, with a quantitative and a qualitative measurement for each goal. It is important that each long-term goal have actionable short-term goals attached. Without those short-term goals to monitor your progress on a constant basis, you can lose sight of the long-term goal. This is of particular concern during difficult economic times, when uncertainties can cause us to be reactionary.
Focus on Throughput over Costs. The most powerful and most difficult thing a business owner can do during a business slowdown is to focus on throughput rather than costs. What is “throughput?” It is defined as “the rate at which cash moves through the system.” Achieving higher sales without adding people results in greater throughput. Achieving higher margins while maintaining inventory turns results in greater throughput. You might be wondering, “why would it be hard to decide to focus on throughput? Throughput makes so much sense!”
The difficulty occurs when you need to make decisions related to throughput. For instance, if you are faced with higher labor costs than you can afford, you may be agonizing over whether to let some of your people go. But have you considered your other options? Have you done everything you can do to drive sales up, which would make your current labor affordable again? “But wait a minute,” you say, “that might require spending some money on marketing!” Exactly. From a cost-world perspective, it may feel better to you to reduce your costs in marketing and labor. From a throughput-world perspective, you would be thinking about how to increase the rate at which cash moves through the system, even if it means making an investment to do so.
It is certainly a difficult decision to make, and may require some risk. But there is also risk involved in losing a qualified, trained employee that you will have to replace again soon, as well as the risk of not being able to satisfy your current customers if you become shallow in the service area, which could lead to further sales downturns.
Prospect like crazy. During previous years as business came marching through the door of its own accord, we didn’t need to prospect very much. Our skills become slack. We lift our ear from the track and take our finger off the pulse. When business suddenly slows, we are taken by surprise. Now is the time to brush off those prospecting skills and put them to work again. There are two types of prospecting – prospecting within your existing customer base, and prospecting for new customers.
When you prospect within your existing customer base, you are looking for ways to bring them back to you earlier than they might have otherwise. A postcard, phone call, or newsletter with useful information can be cost-effective reminders to return to your store. Advertising efforts such as newspaper and radio are also ways of reaching your existing customers, and reminding them to come pay you a visit.
It is also time to look for new customers. Traditional advertising is one way to do this, but there are many ways to get your business known to customers who have not visited your store before. Sponsorship of community events, speaking to local clubs, doing an educational demonstration or publishing articles of interest in local news media can introduce your business to numerous potential customers. The important thing is to proactively look for new customers – don’t expect them to come looking for you.
Invest in marketing. It is a common business mistake to cut marketing expense as a way to improve the bottom line. While reducing your marketing expenditures may result in short-term cash flow benefit, the long term results are generally loss of market share and reduction in sales. If business growth is your long-term goal, and you set a short-term goal of reducing marketing, then your short-term action will guarantee that you do not reach your long-term goal! “But we’re in an economic downturn!” you’re thinking. “I can’t afford to market during an economic downturn!” Think about this as a football game. If you were on a team that was down by 21 points, and you decide to focus all your energy on defense so the other team does not score again, do you have any hope of winning? You still have to play offense if you’re going to come out ahead.
Businesses that market aggressively during economic downturns generally steal market share from those who do not. Now is not the time to engage in risky new marketing ventures. Carefully evaluate the marketing you are doing, and trim programs that are not producing results. Reinvest that money in the programs that have been proven effective. Be prepared to take advantage of poor decisions your competitors may be making, such as eliminating product or service offerings, reducing customer service and product quality, or cutting back on marketing. This creates opportunities for you to gain those customers.
Analyze your competitive position. Do you know what your competitors are doing? Do you follow their ads in the newspaper, on the local radio station, or in mailbox flyers? Do you know what products they carry, and at what prices? What is their reputation for service? What is the quality of their sales and service staff? Investigate your competitors carefully, so you will know what improvements you need to make and where your opportunities lie. Then evaluate your long-term and short-term goals, and see if there is anything you can add that will help you enhance your competitive position. Common wisdom may suggest that you should not make capital investments or add capacity during times of economic downturn. But companies that added technical and production capabilities during the recession of 1974/1975 improved their competitive positions significantly over those who did not. They were able to provide more efficient and more cost effective services and products than their competitors, and customers responded with their pocketbooks.
Focus on Service. People will spend money. They will spend it more carefully, and they will be more selective about where they spend it, but they will have birthdays and holidays and reasons to spend. Are you the service provider of choice? Have you invested energy in training your employees to offer the best customer service? Do your customers know that you go out of your way to do the right thing for them? If you and your staff treat each customer like royalty, that customer will return the favor by recommending your business to others and by making it a point to do business with you again.
Contrary to a popular maxim that “service is free,” service does cost. It will cost you energy and time to do the training and role modeling and extra investment in each and every customer with whom you come in contact. Take some time to evaluate the service you are giving to customers, and do whatever it takes to ensure your entire organization offers the level of service required to ensure your customers return.
Analyze your culture. Just as you may be feeling unsure and unsafe in the present business climate, your employees are probably experiencing the same fears. Human Resource professionals have demonstrated repeatedly that employee satisfaction is based on job satisfaction, involvement in decision making, and the feeling of being valued. Actual rate of pay places a distant fourth place to these other criteria. Do you have a culture that ensures your employees are feeling involved, appreciated and important to your success? Some simple efforts around building and maintaining morale can do wonders for your ability to stay competitive in a contracting marketplace.
Involving all employees in reviewing the state of the business can be a powerful method of both gaining critical information and helping all to feel more positive and productive about the prospects for the business. This is a good time for a company meeting. Ask all your employees for feedback regarding:
· The business objectives and current guiding principles · Business/customer relationships · Business resources and capabilities, its perceived strengths and weaknesses, and · The willingness and ability of employees to sell products and services and cultivate
After you have collected critical feedback, share with all employees your long term and short term goals, and establish agreements regarding how you will track and manage the short-term quantitative and qualitative measurements.
If you are prepared to manage your business for the long-term, you will be far more successful producing profits in the short term. Economic weakness brings out the fear in each of us. But fear and sound decision making generally do not go together. The simple act of assessing your business, its strengths, and weaknesses will help you establish a clear action plan. Continue to assess your business and follow your plan each day, and you will not only find yourself profitable and whole at the other end of this slowdown, you may discover you have acquired excellent new customers and new market share along the way.
© Andrea M. Hill, 2001 |