Finance & Accounting

Make the Right Moves During Business Downturns

Make the Right Moves During Business Downturns

When the going gets rough, successful small businesses get smart. Making wise financial and operational choices can help your business bounce back from the brink of disaster.

By Matt Alderton

When Nancy Duitch co-founded Vertical Branding in 2001, the Los Angeles-based consumer products company was an immediate success. Year after year sales skyrocketed and profits climbed. Then, suddenly, unexpectedly, things changed.

“In 2004, my business partner, a German-Swiss guy who’d developed all the analytics for the company, decided that he wanted to move back to Switzerland with his wife,” Duitch says. “So he did, and I had to buy him out of the company.”

For Vertical Branding, the change was a sucker punch to the gut of its business. Sales came to a halt and Duitch had to fund the company with her own capital to keep it afloat. “We had a very bad year in 2005 because I didn’t have any growth money,” she says. “I was just living on the remnants of old projects.”

Duitch had to ask some difficult questions that year. Should she lay off her employees? Should she change her pricing? Should she call it quits? The answers weren’t easy, she says, but they were instrumental in saving her company. Thanks to her smart choices, in 2006 Vertical Branding rose like a phoenix from its ashes with $5.8 million of infusion capital.

“We were off to the races and once again we’re back making a profit in the company,” she says.

Downturns and slowdowns are inevitable in every company, including yours. In order to weather slow periods, you’ve got to cut costs and build business. How you do each will have a major impact on the future of your business.

Don’t Trust Your Gut
There are typically three causes for a business slowdown, according to David M. Traversi, author of The Source of Leadership: a general economic decline, an industry- or sector-specific decline, or a business shortfall in which your organization, for whatever reason, can’t fulfill its promises.

Whatever the cause, when faced with a business downturn most business owners panic. “Denial seems to be the first stage,” Traversi says. “Once they see that denial is not reversing the situation, fear seems to kick in and fear-based actions are taken.” Those actions, which include making irrational and irresponsible cuts to staff, budgets, benefits and more, often debilitate a business further.

“There are inevitably going to be periods of time because of the economy or industry issues where companies will be put under stress,” says Bob Rudzki, author of Beat the Odds: Avoid Corporate Death and Build a Resilient Enterprise. “It’s important while you’re taking all the necessary short-term actions to manage costs and optimize revenues, to avoid doing things that are foolish.”

Cut Creatively, Carefully
The reality is, however, that when cash is tight, cuts must be made. The question is: where?

“[Most businesses] begin cutting costs, often irrationally, with the question, ‘What costs can be cut?’ as opposed to the better question, ‘What costs should be cut?’” Traversi says.

The two basic options most business owners look to are personnel and supplies, according to Rudzki. “Employment costs and purchased goods and services costs are 80 to 90 percent of the cost structure for most companies,” he says.

Most managers go after employment costs first, since eliminating salaries immediately frees up a large amount of capital. “That can be very short-sighted, though,” Rudzki says, “because you’re not just reducing your costs, you’re reducing the capability of your organization to fulfill the expectations of your customers.”

He recommends focusing first on cutting purchased goods and services. Approach your vendors and suppliers, and negotiate new prices or delayed payment terms. After all, if you’re hurting, they probably are, too.

Of course, if you can’t glean enough green from cuts to services and supplies, then you may very well have to lay off employees. If it comes to that, honesty is always the best policy.

“Communicate honestly and openly with your employees about conditions facing the company,” Traversi says. “If you have built a level of trust and communication with your employees, they can be one of your best allies in weathering a downturn. They will go out of their way to help the company survive. They’ll voluntarily take pay cuts, reduce their work hours, sacrifice perquisites, work extra hard to find new sources of revenue and watch how they spend company money.”

And if that’s not enough, they’re likely to at least be more understanding if they do receive a pink slip.

Remember Revenue
In tough times, businesses shouldn’t focus only on cutting expenses, but also on building revenue.

“You can’t starve your way to success as too many companies have learned,” Rudzki says.

Duitch agrees. When her business began to dive, she refused to let even a single employee loose. Instead, she changed her business model to allow her company to pursue new markets and new opportunities, which in turn created new revenue streams. “You can survive any downturn if you have capital in the company,” she says.

“The reality is that revenue holds as much of a solution to the problem as cost-cutting,” Traversi adds. “What about new customers? What about new product lines? What about strategic alliances?”

And most importantly, Rudzki asks, what about strategy?

“You can take advantage of a business slowdown by having more thinking time,” he says. And time spent thinking about your purpose, values and mission, is without question your best survival tool in the longer term.