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How to keep your business a success in times of economic distress

September 17, 2009

Starting or running a company — which is challenging in the most favorable of business climates — can get really difficult during tough economic times. With sales slumping and customers tightening their belts, this is a good time for businesses to rethink their strategies for navigating the financial storm.

Curb spending — carefully

While it may seem obvious that in a bad economy you need to curb spending, the key is cutting back in the right places. Start by enlisting employees to help cut any expenses that don’t make sense in terms of the long-term success of your business. Because they have a vested interest in your company’s survival and profitability, employees can be valuable allies in the cost-cutting war. Communicate regularly with staff about the need to curb spending, and honor frugal employees by mentioning in a companywide e-mail or newsletter specific measures they’ve taken to control costs in their area.

Also, now isn’t the time to stop marketing or investing in new technologies, especially if those activities are the lifeblood of your business. When your markets are shrinking, you need to do more, not less, to stay competitive.

Moreover, don’t forget that federal and local governments are there to help. Taking advantage of tax incentives, deductions and credits is one of the quickest ways to positively impact your company’s bottom line. Check with your tax advisor to ensure you plan properly and don’t miss any valuable money-saving opportunities.

Minimize fraud

Fraud reduction efforts are another important money-saving measure. According to the Association of Certified Fraud Examiners, the average business loses 5% of its revenue to occupational fraud. Asset misappropriation and theft are two of the most prevalent types of fraud.

You can reduce these threats by implementing sound hiring practices (including background checks on new employees) and a solid system of internal accounting controls, such as segregating duties and requiring a second signature on checks over a certain amount.

If you suspect that major fraud or theft is being perpetrated against your company, now is the time to engage a forensic accountant. These investigators specialize in uncovering financial misconduct and preparing evidence that will stand up in a court of law.

By demonstrating that employees who perpetrate fraud will be caught, the presence of an investigator alone may act as a deterrent and stop future fraud in its tracks. (See related in-depth story.)

Partner with winners

In tough economic times, it’s important to work with suppliers, subcontractors and other business partners that are financially strong. Keep an eye on the stability of your closest business partners, and avoid prepaying contracts, especially if solvency is in question.

Networking to improve your customer and supplier relationships continues to be important as well. Now is the time to be proactive, rather than reactive. Maintaining good relationships with suppliers is vital, so keep the conversation open and flowing with customers and vendors alike. A good supplier may even help you through some tough times by extending credit or setting up a workable payment plan, if you’re up front with them about your situation.

Stay on top of receivables

Being proactive during the collection process can go a long way toward ensuring that your company’s cash flow remains positive and problem accounts are spotted quickly. One way to be proactive is to call a customer before an invoice becomes due. This will help ensure that: •the invoice has been received and processed for payment; •the client is satisfied and there are no unknown issues; and •payment will be issued by the due date.

It may not be practical to follow up proactively on all your invoices, so consider establishing a threshold relative to the size of your company’s average transaction so that the customers or clients that account for 80% of the total dollars coming due in the coming week are called.

Borrow smartly

If a cash influx is needed to run or grow your business and money seems hard to come by, consider an asset- or equity-based loan. An asset-based loan is secured by the value of your company’s inventory, accounts receivable, equipment or real estate. An equity-based loan is secured by an ownership interest in your company.

Although most entrepreneurs would prefer unsecured loans, don’t let your reluctance about secured loans cripple your business.

Sticking close to home with local lenders, such as smaller regional banks, credit unions and private investors, is generally the best way to procure a loan during an economic downturn. Developing a strong loan package that includes a business plan, a competitive analysis and a complete set of financial statements can also do much to advance your cause. Your package should also include an analysis of the strengths, weaknesses, opportunities and threats related to your business.

Vigilance pays off

In a time when costs are increasing and competition continues to tighten, it’s important to keep a watchful eye on your bottom line and everything that goes into it. By making smart moves now, you may actually be able to turn a bad economy into a business opportunity.

Raising revenue when markets are down

Implementing income-boosting measures in tough economic times is also important. Start by strengthening bonds with your existing customers. By working to serve them in additional areas, you may be able to increase revenue within your current customer base. Build business by rewarding referrals, and try to create new business alliances wherever you can.

Find ways to pass along costs to your customers, without pricing yourself out of the market. Cutting margins so low that even the slightest mistake can result in financial disaster isn’t a good idea, so avoid the urge to lower prices as a sales-boosting strategy. Because price cutting often leads to reduced profitability, stay away from the “price war” arena.

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