How to Weather a Stormy Economy
Gas prices are up, revenues are down, and money is tight. What’s a small business owner to do?
There are several important strategies you can use to see you through these difficult economic times. Here are five of them:
1. Protect your personal assets. All businesses hope to survive difficult economic times, but the reality is that some will undoubtedly fail. If yours does, what happens to you? It depends on how you’ve set up your business.
- Sole proprietorships and partnerships — Creditors can look to your personal assets—your home, your car and your savings—to satisfy their claims.
- Limited liability companies and corporations — Creditors can only satisfy their claims from business assets; your personal assets are fully protected.
If your personal assets are currently vulnerable (e.g., you’re an independent contractor), consider changing your form of entity to an LLC or corporation, an entity that gives you personal liability protection.
Changing from a sole proprietorship to an LLC or corporation doesn't need to be expensive. You can even avoid legal fees and filing errors by using one of the more popular online filing services (for example, BizFilings.com).
2. Keep close watch on cash flow. The difference between surviving and going under when times are tough depends in large part on your cash flow. If you have the money to pay your bills when they come due, you can get by without damaging your credit rating and position yourself for future growth. To do this you need to carefully monitor your cash flow.
- Limit credit to customers — If customers are experiencing economic problems, you don’t want to be left holding the bag (with your receivables unpaid). Do credit checks before deciding whether to advance credit to new customers. Cap the amount of credit you’re willing to extend. Get partial payment for services upfront and bill upon completion of phases of a large project.
- Review and revise your collection policy — For instance, if you ordinarily wait until an invoice is 30 days past due, you might want to re-invoice after 15 days. If you normally wait two months before calling a delinquent customer, accelerate the time to call—the longer you wait, the less likely it is that you’ll collect the money.
If you don’t have a line of credit in place, but your company is still sound, now is a good time to apply for one. Even though lending qualifications have tightened for business loans from major banks, fiscally sound businesses can still obtain this type of financing.
Having the line in place will help you if things sour or great opportunities happen, and you want to act quickly. A line of credit is sound borrowing—you only pay interest on the money you take from the line. For instance, if your company has a $20,000 line of credit and you use $5,000 to buy a new computer system, you’ll pay interest on $5,000.
3. Continue to market wisely. Slow times are no excuse for slacking off on marketing. You need to continually develop your pipeline of customers, so review your marketing plan now. It may be time to look at new marketing strategies that won’t strain your budget.
- Maximize referrals — Ask existing customers for referrals. Offer them some reward, such as discounts on their future purchase for giving you referrals.
- Get feedback — Now is an ideal time to find out what you’re doing right or wrong by asking your customers. Develop a questionnaire for them to complete--again offer some reward for their cooperation.
- Review your website — You may have been too busy to update your site and keep things fresh. Add new features that can attract new business, such as a blog to establish you as an expert in your industry.
4. Trim overhead. If revenues are down, you can maintain profitability or minimize losses by cutting your expenses. No expenditure should be considered sacred.
- Reevaluate your space — If you’re not utilizing it effectively, consider subleasing a portion if your lease allows you to do it. By bringing in rent, you’ve reduced your rental cost.
- Employ energy conservation initiatives — With the cost of fuel and electricity high, any and all conservation measures can save you money. Adjust the thermostat to minimize energy usage. Upgrade to energy-efficient equipment.
- Restrict T&E — It’s costly for employees to travel and to entertain customers, vendors and other business associates. Find alternative ways to connect with these important people, such as videoconferencing. If you do need face-to-face contact, opt for less costly arrangements, such as doing lunch rather than dinner and forgoing the theater or sporting events.
- Comparison shop your insurance policies — Many small business owners routinely renew policies annually rather than shopping around for better deals. With premiums on health coverage and other policies still on the rise, it pays to check out your options.
Caution: Think long and hard before laying off employees. The economic downturn is temporary, and it will be very costly to find and train new employees needed when business is booming again. In fact, layoffs by other companies mean you have a greater pool of talented and experienced workers to consider for your openings now.
5. Look ahead. If business is slow, you may have time on your hands. Turn lemons into lemonade by spending this time doing strategic planning.
- Meet with advisers — If your business has an advisory board, get together and discuss strategies for the short and long term. Where do you see you business in three years? Five years? What will it take to get there? What can you do now to make it happen? Meet with your accountant to strategize your tax planning for the rest of the year.
- Revisit your business plan — If you started out with a written plan to guide you, it’s time to take another look. It may be that your initial business model is no longer viable in today’s marketplace. Developments on the Internet, changes in how companies connect with customers, and modifications of law may send you back to the drawing board.
- Stay optimistic — Recognize that, like previous economic downturns, an upswing is just around the corner. Prepare your business to take advantage of opportunities that will surely present themselves soon.