There is an old joke about two campers who stumble across a bear in the woods.  Angered at being disturbed, the animal runs headlong at the campers. The campers turn and flee. The beast shows no sign of giving up the chase, so after a while one camper worriedly says to his pal: “I don’t think we can outrun this bear.” The other says: “I’m not trying to outrun the bear. I’m just trying to outrun you.”

Almost all markets have turned bearish of late. How should the small business react? Not panicking is a good start. However gloomy conditions may seem, they will be gloomy for competitors, too.

Downturns are the economic equivalent of Darwinism – a test where the fittest survive.  The primary goal is survival, especially for small businesses that lack a deep well of resources to help ride things out.  The secondary goal is living well, keeping strong and gathering the resources that will improve the chances of surviving any unforeseen problems that lie ahead.  Surviving hence means having a keen focus on all the advantages and efficiencies that may seem small in scale, but could make the crucial difference between the business that fails and the business that survives to enjoy the eventual recovery.

Staying One Step Ahead of the Bear

A good place to start is with some cold hard calculations.  What does your business need to do to survive?  Forget profits for the moment.  Cash is the lifeblood of a business.  Businesses disappear for the lack of cash, not for the lack of profits.  Think about cash, where it comes from, and where it goes to.  Think also about reserves of cash the business can draw upon.  Identify what the business needs to do to make the cash that will keep it alive for a month, 3 months, 6 months, and a year.  If things get really desperate you may need to shift timescales to weeks or even days.  Do not spend so long playing with numbers that you forget to actually run the business, but make sure you know what the cash targets are and keep them up to date as time passes and circumstances change.  Replace any existing business targets with cash-oriented versions of them wherever possible.  For example instead of paying commission to salesmen based on taking an order from a customer, pay commission based on the receipt of payments from the customer; this will encourage people to prioritize the best payers.

Once the cash baseline is understood, identify every opportunity to lower the baseline or make it more flexible.  Identifying opportunities does not mean acting on them immediately, as many of them will involve a trade-off between cash today and profit tomorrow.  But identifying the opportunities means you will be ready to take the pragmatic steps needed to keep the business running during its darkest days.  That advice may seem obvious, but even big businesses can struggle with this: the American automobile industry with its high fixed costs and over-reliance on achieving a high volume of unit sales is a very topical example.  To further understand and manage the baseline, consider the following questions:

1. How flexible is your business, and how easy would it be to scale things down, if sales were weak, or scale things up again, when new sales opportunities arise?

Consider the extent to which your costs (including people, equipment, materials and property) are fixed or vary with sales.  If you have fixed costs, consider how these might be turned into variable costs.  For example, could you move into smaller offices or close an office and only rent additional space on a short-term basis from a provider like Regus when really needed?  Instead of tying up money by holding stock, it may be worth switching to a supplier that can guarantee rapid delivery when you need something.  If you have employees, instead of just cutting back on staff, you may be able to negotiate more flexible arrangements where they get paid when there is work to do, and not when the order book is empty.  Though some may find that hard to accept, if you are frank and honest with staff they may prefer to come to terms with you and get some work, rather than risk the collapse of your business and the prospect that they will have no work at all.  At the same time, identify ways to increase manpower at short notice.  Survival is also about being able to take advantage of the fewer opportunities that come your way.

2. If a key supplier fails, does your business fail?

Getting a good deal from one supplier can help keep costs low, especially with discounts for bulk purchases.  However, look hard at any key suppliers and understand if there is a risk that they might fail.  Think ahead and judge the difficulty of switching suppliers at short notice.  If there is a danger that a key supplier may fail, establish a relationship and make some purchases from an alternative now.  This will reduce the impact if the worst happens to your normal supplier.

3. Where would you turn if there was an emergency, and your business faces insolvency if you cannot find a quick source of extra cash?

Overdrafts are one answer to this problem, but when businesses are under strain, the overdraft can stop being a temporary source of emergency money and can start becoming a permanent crutch.  The danger is this crutch can always be kicked away at a moment’s notice.  Instead of relying solely on the bank, there may be other, better options.  They may involve sacrificing longer-run profitability in order to generate some cash inflows immediately, but recognize that there will be no profits if you cannot survive long enough to realize them.  For example, a large customer may be given a generous one-off discount in return for early payment or prepayment of a large invoice.  Stock may be sold at a loss instead of keeping it in a warehouse. Selling some of your retail debtors to a factor would enable you to get discounted cash inflows immediately.  Suppliers may be willing to provide extra credit rather than lose a reliable customer because the business failed, especially if you can commit to making purchases in future.

4. Are there ways to reduce costs by thinking ahead?

If you have more room for movement, now may be a good time to make investment decisions designed to help reduce your cost base.  For example, heavy discounting may make this a good time to buy essential equipment instead of renting it, so long as you have the resources to cover the initial outlay.

To be continued in the 12/31 post “Beating Competitors in the Long Run”

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