“Every problem is a gift – without problems we would not grow.”
How will your firm do when the economy takes a nose-dive? In the United States, economic downturns happen about every 10 years. Downturns are followed by many lean months for small business owners.
Most experts predict an economic downturn by the middle of 2023, while Citigroup, Deloitte, and PNC predicted one might come sooner.
Owners may remain optimistic in the face of downturns by taking decisive action to secure their firm from an unstable economy. Kitchen and bath firm owners who have diversified their products and service to serve upscale remodeling markets tend to perform above average or better when the economy is weak.
While strategic turnarounds are possible in almost every state a business can be in, the longer you wait, the more difficult and painful it is to have a successful turnaround.
On the heels of recommendations from crisis managers and SEN members’ experiences, consider SEN’s ten critical strategies when confronting an economic downturn.
First strategy: Shift your mindset from profit to leadership
Create a revised strategic direction with your most dependable team members and your business coach if you meet with one regularly. You’ll need other brains on the task to help you troubleshoot and ensure all the aspects of your business are accounted for. Then share this strategy with your need-to-know personnel.
An owner’s mindset should shift from being efficient to being effective.
Second strategy: Keep your standards up
Take only projects in bad times that you would take in good times.
You’re not going to grow your business during an economic downturn because consumers typically have less income or liquidated assets to spend, so there are fewer leads. Owners shouldn’t lower their prices to keep the cadence of getting new jobs they had in a healthy economy.
Say your firm dropped its average markup by 15%, you’d be scrambling to make that 44% more revenue back to have the same gross profit dollars. It’s not worth it. It’s better to continue charging your standard markup, take fewer jobs, and reduce your overhead.
Third strategy: Budget your business to its core
Making cutbacks isn’t the same as cutting corners; they’re about trimming the fat off your business. But some fat must remain.
- Review your income statement and cut all accounts, personnel positions, and activities that do not add value to the client
- Create a three-year budget – this will deliver insights into taking positive action when your income levels return to the previous level of revenue – or beyond
- Keep dollars flowing into your marketing budget
- Showing the image of your healthy, forward-thinking firm during difficult economic times sends a powerful message of leadership and dependability to your prospects and clients – keep marketing your brand!
Fourth strategy: Create “what if” scenarios
Have a sharper idea of navigating your business during turbulent times by creating three “what if” case scenarios. You’ll have less heartache or surprise after you’re prepared for the possibilities that may unfold.
- Create “worst case,” “moderate case,” and “best case” scenarios for the trajectory of your business over three years
- Review these case scenarios with a trusted advisor who knows the kitchen and bath business. This feedback can help you determine if you’re making realistic projections and if there’s anything else you need to consider
- Be prepared to take the first pay cut when downsizing
- Communicate your new strategy to your core team members
Fifth strategy: Establish a cash flow forecast as your essential management tool
Create a cash flow forecast for three months out. This is a byproduct of your three-year budget from the third strategy.
Think of this budget as a magnifying glass that allows you to see your firm’s activity in a shorter period. These flow forecasts might be updated monthly, weekly, or even daily, depending upon what the economy and your business are doing.
Your accounts payable aging, balance sheet, income statement, and so forth all factor into your cash flow forecast. Hence when they change, your cash flow forecast should be updated.
Sixth strategy: Create a forecasting system for leads, sales orders, and income
By posting your actual monthly results to each forecast, you can expect to:
- Be able to quickly compare results for each Key Performance Indicator (KPI) against goals based on your current budget
- Project end-of-the-year results based on cumulative monthly percentages of each KPI developed from historical performance
For example, if historically 41% of your leads are expected to be received by April 30, and you have received 35, then your year-end projection would be 85 (35 ÷ .41 = 85). If your goal is 110 leads, you would be off by 23%.
What action should you take in May to make up for this lead deficit?
Seventh strategy: Secure a credit line before you need it
During a recession, having cash to pay your bills is necessary. That’s why crisis managers say: “Cash is king!”
Once you’ve secured a home equity line of credit, draw down on the line immediately and place the proceeds in a savings account at another bank. If you don’t put these funds in another bank account, the bank issuing you a line of credit may cancel your line if the business downturn worsens or you don’t use it.
Eighth strategy: Have a superstar collect accounts receivable
Choose a superstar from your administrative team who will tenaciously go after those entities who owe your firm payment. The superstar has the difficult job of making collections. They should be charismatic, direct, and pleasant to complete the job efficiently.
The three categories of nonpayment are: “Can’t pay,” “Won’t pay,” and “Shouldn’t pay” (because, in their mind, your firm did something wrong).
- Make sure your superstar focuses on the “won’t pay” category
- Have them develop a strategy of how to secure the funds
- They should report back to you any difficulty they have in collecting these funds
- Assistance may be needed from another team member if a non-paying account does not answer to reason. Have somebody in mind from the onset who works well with your superstar
Ninth strategy: Leverage sub-contractors and part-timers
Cutting your team’s hours or pay are short-term solutions. Your strategic plan should indicate when and how team layoffs must be made.
- Make layoffs simultaneously
- One-time cuts reduce the stress your remaining staff may have
- Consult with an attorney to make sure your layoffs are done correctly
If you make the right cuts early on, you’ll save in benefit payments and payroll taxes.
Tenth strategy: Stay close to your creditors
Owners should build a strong working relationship with their creditors so that when times are tough, they are more likely to agree to your request to pay them when it’s comfortable for your firm.
- Notify your creditors of your downsizing plans so they hear it directly from you
- Use your three-month cash flow forecast as a guideline to decide when you can offer to send payments
- If you are prevented from making a payment as planned, initiate contact with your creditor to let them know the reason for your delay and when you can make the payment
- Always be flexible and work with your creditors to negotiate new terms, but keep your commitments with them within your means to continue buying from your vendors
Economic downturns are not easy on small business owners; however, those who step up their leadership, make cuts at the right time, and keep up their firms’ standards will buy themselves control and comfort during unpleasant times – and come out doing business better than before when the boom times return.
—SEN Leadership Team
Master strategic planning, selling more into each job, leveraging technology, Good-Better-Best selling, and other smart implementations at one of SEN University’s valued online business courses – or contact Shannon Blair to attend our in-person schools.
