How do You Deal with Economic Downturns?
Provided by Visa, Content Partner for the SME Toolkit
STEERING THROUGH THE STORM
Some businesses appear doomed to extinction no matter what the economic conditions—for example, record stores and film manufacturers. But for most other business owners, the major concern is a bad business climate. What can you expect when the economy slips? You can definitely expect accounts receivable to slow up (since other business won't be able to pay on time), and you should also expect to carry an excess in inventory (as sales slow).
Economic downturns require immediate attention. We recommend quick responses and diligent monitoring of your numbers. Stay on top of the accounts receivables and inventories and try to keep sales and payroll within the proper parameters. For example, if payroll should be 12% [of your budget], then adjust hours to stay within that range.”
Question: How do you prevent a vendor's cash flow problem from becoming yours?
Answer: Find another vendor. In other words, adopt a zero tolerance attitude for any sinking ships in your network. You must not allow suppliers' problems to become your problem.
It's not always possible (and you may not always want) to immediately abandon a vendor in trouble. In that case you'll need to monitor your vendors by getting current and accurate information. If you don't talk to your vendors, you may not learn they're headed to bankruptcy court … until you open your mail. Don't be shy about asking questions. Consider running annual credit reports on your major suppliers to see if they are having problems.
Here are a few things to consider during tough economic times.
- Reassess variable costs and discretionary expenses.
When there's a downturn, you have to go back to ground zero with budgeting and look at all your activities, everything that's going on, and everything that's planned. You need to take a hard look at variable expenses and how to minimize them.
- Minimize staffing expenses by outsourcing.
Small business owners are constrained by staffing. You can try outsourcing when possible if the volume drops down. Outsourcing can provide additional capacity without the problems of laying off people and the attendant costs that go with that.
- Cut customers.
This may sound counter-intuitive but sometimes it helps to revisit your customer base, particularly those that are considerably past due. The last thing you need right now are material shortfalls in revenue.
- Reduce inventories.
Now is a good time to look at marginal product areas and decide if you want to cut inventory.
- Ask for help.
Don't be shy about asking others—particularly loyal employees, customers, or vendors—for help. Employees may be able to make concessions or offer suggestions that will help you get through the hard times. The same is true for customers and vendors who want you to survive.
- Consider discounts.
Sometimes, the only way to keep the doors open is to cut fees and prices. We're not advising a permanent across-the-board cut, but consider offering a dramatic one-time cut on certain items, for example, lowering sandwich menu prices, or providing a one-time discount on dog shampoos.
- Seek Short-Term Financing Solutions.
Credit card programs, with their flexibility and financing solutions may provide a short-term funding solution for hard times. In addition, card programs offer discounts and bonuses based on customer loyalty.
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