Chances are that, like most small business people, you are an optimist—pessimists usually work for someone else. Even if your business is melting down in front of your eyes, you hope that sales will pick up next week, next month, or next spring. Sorry, but when economic times are bad and threatening to get worse, the opposite is more likely to be true. Just as in boom times your happiest projections may consistently be surpassed, chances are that when many things are going wrong, more will. You need to create change and make cutbacks fast enough to bring income in line with expenses. Here are some ideas.
Question Your Assumptions
Every small business rests on a set of fundamental and often simple commercial assumptions such as these:
- When dogs get sick, owners take them to a vet.
- When cars are filthy, people wash them.
- When people are hungry at the beach, they buy food.
This much is obvious. But what can be less obvious is that when a recession hits, the assumptions behind many successful small businesses become invalid or lose much of their power.
EXAMPLE: Pam operates an upscale children's clothing boutique in a trendy resort town. Her fundamental business assumption is that grandparents on vacation will pay top dollar for cute outfits to take home as presents for their grandkids. But six months into the recession, Pam realizes that this is no longer true. Because only about half as many older tourists are visiting the town as previously, and many are traumatized by their shrinking retirement plans, the days of free-spending grandparents are plainly over.
So, with her sales down 50% and her lease expiring, and no reasonable prospect of returning to profitability in the next six months, Pam has a big sale and closes down. She knows she'll eventually open another business, but for now she'll spend more time with her own grandkids.
Concentrate on Your Core Business
Once you honestly face up to the fact that boom times may not return for many years, you need to either close down, sell, or quickly develop and implement a realistic plan to turn your business into a survivor. This often means identifying your business's profitable core and shucking off all or most activities that are not part of it. For instance, a publisher of regional guidebooks with a dozen well-established, profitable titles, and many others that barely break even, might be hit hard when a recession cuts into the area's tourist business. It will need to quickly redesign its business plan around income produced by the core titles that still make money. This is true even though it will mean laying off valued employees, canceling speculative new titles, and pruning the backlist.
EXAMPLE: Jack owns Racafrax Roofing, a company with 32 employees, when the recession hits and orders dry up. Immediately laying off 20 employees, moving to a tiny, cheap office, selling two of his four trucks, and hiring a local lawyer to send threatening but very effective letters to his past-due accounts stops the worst of the bleeding, but Jack is still losing money. Realizing most residential and commercial customers are putting off major roof replacement work, Jack focuses on repairs, a fussy lower-profit business he used to avoid. But now, every time it rains, Jack leaflets entire neighborhoods. With water pouring in, Racafrax gets lots of emergency calls, most of which he can deal with before the next rain when the process starts all over.
Although Jack misses the days when big jobs produced big profits, he can return a much smaller Racafrax to modest profitability just seven months after it began losing money. Then, six months later, when two other local roofers who haven't hustled as hard go out of business, Jack realizes that Racafrax is back in the black for good. True, the economy will have to recover before significant profits return, but he knows he'll be there when they do.
You must slash costs to fit your new lowered income projection. Depending on your situation, this can involve cutting every possible expense, moving to a less costly location, laying off employees, and aggressively collecting past due debts. For ideas that you may not have thought of, see Nolo's article on How to Cut Costs and Spend Less in a Cash-Strapped Business.
Change Your Strategy
If your business's current strategy is failing because people aren't spending money right now, then change it. There are as many ways to do this as there are small businesses, but when times are tough, a common theme is to pivot a business so that it's more in tune with the recessionary environment. To attract frugal customers, you'll typically want to convince them that your business is all about providing value, reliability, and frugality. For example:
- Millie's Way Cool Boutique might devote half of the store to "Way Cool Vintage" clothing.
- Ihara Marine, which offers full-day charter trips, might add lower cost half-day fishing trips priced to fit shrinking family vacation budgets.
- Elegant Lighting of Lakeport might reconfigure itself as the Lakeport Green Lighting Center, offering environmentally conscious choices.
- James & Cirelli, a small business law firm, might start handling business bankruptcies, lease workouts, and bad debt collections, and tell clients that fees will be $50 per hour less until the economy recovers.
Come Up With New Marketing Ideas
You'll need a low-cost and highly effective marketing campaign to reach out to recession-shocked customers. Your strategies must hinge on understanding who your best customers are, how to reach them most effectively, and how to provide incentives for them to purchase goods and services on which you make a decent profit. Here are a few examples:
- A yoga studio that offers existing customers a 10% discount for bringing in a new student.
- A boutique that offers periodic "Present-Buying for Guys" classes (husbands and boyfriends), along with a 15% after-class discount coupon.
- A roofer who advertises low-cost gutter cleaning in affluent neighborhoods, letting him at the same time give each homeowner a free roof assessment highlighting areas that need immediate attention.
- A hardware store that features a sale on low-cost holiday lights to attract people to the store's high-margin Christmas ornament section.
- A jewelry store that features three watch battery replacements for the price of two and, in the process, attracts hundreds of dollars worth of higher-margin repairs on jewelry that customers bring along.
For more help with turning around a business, see our articles on businesses with cash flow problems.