As a small business, we feel the downturn in the economy much more keenly than any large business.
Generally, small businesses have less capital behind them, less reserves. Small businesses find it hard to "hang on" until the upturn because their volumes and margins are tighter.
But it is possible for any small business to survive any downturn if they follow a series of common sense business strategies.
These strategies are common sense strategies that you should be using no matter what the economic climate, but sadly when times are good businesses allow themselves to get “fat” and some of these every-day disciplines are allowed to slacken.
The strategies are both defensive and "offensive" strategies.
When times are tight and profit and cash performance are poor, it is difficult not to panic and look to tighten all the hatches defensively. However, you can tighten activity too much and turn defensive strategies into a downward spiral for the business. While it is natural to concentrate on the defensive strategies such as cutting costs, it is important to keep in mind what I call "offensive" strategies – initiatives that your business should undertake to ensure that you are the one that keeps selling when others are closing down.
The 6 defensive and 6 offensive strategies are:
- Control your inventory
Retain your cash
Keep your receivables flowing
Cut your costs
Review your borrowing
- Increase marketing efforts
Focus on customer service
Invest in winning employees
Innovate, innovate, innovate
Let's dive into each of these 12 strategies.
First, control your inventory. Identify which lines of stock turn over quickly. If you do not already know find out immediately the number of days’ each line of stock takes to turn over. Calculate economic order quantities (EOQ) for each line of stock – this is a function of cost, the time taken to receive an order from your suppliers, and the time taken to turn over stock in hand. Ensure you are only carrying EOQ’s in hand as otherwise, you may be sitting on your profits as your stock sits on your shelves.
Second, retain your cash. Cash is king when times are tight. Cash is always king, but especially when times are tight! Where assets such as stock and capital investments or plant and equipment may have been good investments in times of growth, in times of recessionary influences, cash in hand is necessary to take advantage of opportunities and make rainy day decisions. The other 5 defensive strategies will help you retain cash, however, the most important strategy is to keep the focus on cash and cash transactions. Ask yourself questions like
"Can you find a cheaper supply?"
"Are discounts available?"
"Are you carrying excess plant and equipment that can be sold?"
"Can you be more efficient or productive?"
Third, keep the receivables flowing. Ensure that you are in constant communication with your customers, not only for offensive purposes as discussed later but certainly to be aware of their trading conditions. Do not get caught out by customers closing down when they owe you money. Review your credit policies. As soon as debts become overdue, call them and find out why. Offer discounts for early payment (without allowing margins to suffer significantly). Be prepared to stop supply to customers who are using you as their bank.
Fourth, cut your costs. Review all your expenditures and ask yourself if any savings can be made.
But a word of caution - the answer to whether you can and should cut certaqin costs must be made in the light of maintaining trading positions. It may be clear that you can save costs by reducing telephone lines from 6 to 4, but if your business needs constant telephone contact with customers and all 6 lines are constantly lit up, reducing this cost merely restricts your business model.
Fifth, review your borrowing arrangements. Most businesses have a set-and-forget relationship with their banks. That is, they arrange a loan or some other facility and then fail to communicate with their bank until it is time to renegotiate. Instead, you must keep your lines of communications with banks open. Ensure they receive financial reports from you on time, develop a relationship with your bank manager so that they know how your business is travelling. At the same time, review your arrangements – they may have been made some years ago when interest rates were high. See if borrowings can be refinanced or renegotiated. Change banks if you have to - the days of loyalty and personal relationships is over.
Finally, the sixth defensive strategy is to increase efficiency. When times are good your business' efficiency and productivity are often allowed to slip, particularly as too few businesses measure efficiency. How do you measure the efficiency of a retail business or a medical practice? Surely it is much easier to measure efficiency in a manufacturing business or a law firm that keeps time sheets? It may be easier but it is not impossible to measure the efficiency of any business. You can measure the efficiency of staff, of processes, of equipment. In a retail business how many customers do individuals serve a day? How long is a consult in a medical practice? How long does it take you to receive an order and send it out?
Let's now look at the offensive strategies.
Offensive strategies need not be costly, which is the fear of any business person in a defensive mind-set. In fact all the offensive strategies discussed here can be implemented without increased cost, by focusing on what you already do but doing it better, or by switching unproductive spending towards outcome-focused expenditure.
The first offensive strategy is to increase, yes increase your marketing efforts. The worst possible thing you can do when there is increasing competition for your customer’s dollar is to reduce marketing - that's just leaving the field to the other team. As you reduce marketing your market forgets you. Low cost or no-cost ways to increase marketing may involve “inbound marketing” on the web through your website. Build a better website, increase search engine optimisation, use social networking sites such as You Tube and Facebook. An effective outbound marketing strategy that involves low additional cost (other than time) is to increase contact with customers. One of the most effective means of cost-effective marketing is simply doing what you do well but doing it even better, and ensuring customer service is tuned to 100%.
This leads us to the second offensive strategy of focusing on customer service. Do not allow your customer to forget you. When you are face to face, smile, ensure you are listening to their needs, thank them as they leave whether or not they have bought something. Keep up contact with them, call them after they have bought something to see if they are happy with the product and the service, offer after sales service and “frequent buyer” programs. Give them value-added service without it costing you much more – faster delivery times, wider selections.
The third offensive strategy is to look to diversify. Once you have measured your stock turn (defensive strategy number 1) look to increase products and services with selections that meet real needs. Firstly, see if any products or services related to the ones you sell now are more appropriate in tighter economic times – whitegoods retailers should look for new lines of appliances that cost less to run, investment advisers should look to introducing financial health reviews of client investments, service providers should look to provide “packaged” extra-value services, and so on. Secondly, look at products and services that competitors are exiting from, perhaps defensively, especially where these leave demand unsatisfied.
The fourth offensive strategy is to invest in winning employees. While it is true that at all times we should look after our best employees, when we are busy and our sales is going through the roof, it is easy to allow the odd non-perfomer to slip through simply because we need the extra hands. Some of these non-performers may have been weeded out as you went through defensive strategies to increase efficiency and cut costs, but you now need to turn your attention to the winning members of the team. In many businesses, they are your first contact with the customer. You need to recognise and reward winners to ensure they stay with you, keep performing, and where necessary, pick up some of the slack from the non-performers that you have had to let go.
Innovation, innovation, innovation is the fifth offensive strategy, and so important it has to be named three times! As much as marketing and customer service, innovation will keep you in the minds of the customers. Innovation may take the form of innovative customer service as well as in new products and services. Use the latest technology to get your services or goods to market faster; use technology to keep in touch with customers through e-mails and blogs; use innovation to improve processes.
Finally the sixth offensive strategy is to create partnerships. As businesses feel the pinch, supporting one another is a good way to keep head and shoulders above the competition. Offer cross-selling with related or nearby businesses. For example, get together with the local restaurant and offer a dinner for two for every purchase above $200 (and the restaurant can offer a small gift, collectible from your store for every bill above $200). If you are a clothing retailer, for example, you might get together with a local shoe shop and offer discounts for a matching pair of shoes (and the shoe shop can return the same discount offer).
So, can you survive a really bad downturn in the economy?
It's not guaranteed but implementing some simple and low-cost/ high-value strategies can increase your chances of survival, and more importantly ensure that when the downturn hits bottom and start to track upwards, you have not only survived but are ready to leap ahead.