What to do when preparing for an economic downturn

The Denver Post | BUSINESS

PUBLISHED:  March 22, 2020 at 6:00 a.m

by  GARY MILLER | GEM Strategy Management, Inc. | gmiller@gemstrategymanagement.com

Over the last month I have received numerous phone calls from business owners wondering if the U.S. is headed for an economic downturn, or worse yet a recession due to the Coronavirus. Much ink has been spilled writing about the Coronavirus and its potential effects on businesses. So, more spilled ink about the virus won’t alleviate business owner’s fears and uncertainties. No one can predict accurately when the next recession will occur. Even though the stock markets are gyrating, and uncertainty prevails, Forbes states that economic indicators and consumer confidence remains strong. Unemployment is low.

However, business owners concerns are not unfounded. Since the Federal Reserve has cut interest rates to 0 percent, the President declared a national emergency and Congress has passed several legislative measures to shore of the economy, any prudent business owner would do well to prepare for the worst.

Several steps business owners, particularly small business owners, can take to help his/her business survive a recession are advisable. Business tips from American Express explain that large-scale cuts are not always necessary.  However, taking a commonsense approach to reduce expenses can add up to improving the bottom line during these uncertain times. The six steps below are a good start to streamlining your business operations.

Reduce discretionary spending.

Examine everything from office supplies to office salaries. Look hard at payroll expenses and look for ways to reduce staff expenses. Reducing hours worked by your hourly work force can postpone permanent layoffs later on.

Simply reducing workforce hours now will produce instant results since payroll is one of the largest business expenses. Painful as this is, it is better to land in the business recovery room, rather than landing in the business morgue at the end of the recession.

Postpone any discretionary expenses such as conferences, unnecessary travel, hardware and software, equipment and advertising expenses that are not critical to your business. If you need to buy equipment now, buy used or refurbished equipment (with a warranty). Look hard at every line item expense on your P&L statements to see if you can reduce your monthly “burn rate” to preserve cash. For example, cut down on printing and substitute various internet platforms to replace printed materials. Outsourcing your bookkeeping, HR and IT functions are less expensive than having full-time personnel functioning in those positions. Regarding IT functions, consider outsourcing those tasks to India and the Far East.

Cutting a little of the smaller expenses can add up too – like reducing your office supplies costs. Contact your vendors and tell them that you are price-shopping to cut costs and ask for additional discounts. Search for vendors you do not use currently and see if they can beat the prices you are now paying. Bid out everything whenever possible.

 Build cash.

 Focus on your receivables. Step up the pace of your collection efforts. Start with the over 90-day group and press them hard for paying up or making smaller, but consistent, weekly or monthly payments.  Next jump on the over 60-day group and do the same thing. You may want to offer a small discount for a payment that brings accounts update. Follow-up on the over 30-day group and ask for payment immediately, assuming your invoices are net-15 or net-30.

Build savings by establishing a “rainy day account”, as a reserve for cash-flow purposes. Look at your banking fees and determine if you can consolidate various bank accounts. If you have bank debt, go to you bank and ask them to reduce the interest rate on your loans or your lines of credit. After all, the Federal Funds Rate is 0 percent.

Reexamine your business insurance policies to ensure that you are not over-insured or have duplicate coverage.

Manage your inventory wisely.

This is a good time to take a long hard look at inventory. Most businesses have some portion of their inventory that is obsolete, selling slower than expected or not selling at all. Convert this inventory to cash as soon as possible by steeply discounting prices.  Yes, you may be losing money on that portion of your inventory, but better you generate some cash than no cash at all.

Manage debt.

Many small business owners have more than one business credit card and carry a monthly balance on one or more of them. Interest rates can range from 12% to  33% annually (APR). Pay them off as soon as possible.  If you do not have the  cash to pay  off the balances, seek a bank loan from your primary lender or from  an alternative internet lender, such as Lendingtree, LendingClub, Lendingpoint,  SoFi,   Kabbage, and Marcus by Goldman Sachs, among others.

 Examine your marketing expenses.

Many business owners think that they are wasting half of the marketing budget; they  just don’t know which half. Therefore, they keep spending in fear of cutting the wrong  parts of their budget. A number of functions such as product support, customer service, advertising, sales promotion, sale’s staff and business development  personnel are all marketing expenses can spell trouble.  So be careful which ones you  cut or lower.

Ask yourself, are you spending marketing dollars in areas where your best and largest  customers are located. Second, identify those markets that offer you the greatest opportunity to expand and diversify your customer base. The objective is  to lower your   concentration of risk. A business can be in real trouble during a recession if 80 percent of its revenues are concentrated in 20 percent of your customers.

Expand your online presence to generate more internet sales.

During the Coronavirus outbreak people are staying home. Shopping malls, cities,  airports, and restaurants are empty. Almost every industry, along with its supply chain, is being effected. A mistake that some business owners make, is reducing direct and  indirect expenses that are designed to grow             revenues. I advise clients to increase  business development efforts. Look for new revenue streams generated through    internet platforms.

Customer purchase behavior is constantly changing. This current health crisis may change purchase behavior for years to come. Customers want your business to be where they are.  A virtual presence is critical for long term sustainability. Study after   study supports the conclusion that customers, whether they are B2C or B2B, first go to the internet for information and knowledge first, before their actual purchase is made.

A good practice is to email customers and direct them to your company website. Notify    them of new product/service offerings, new pricing and distribution terms, price and  policy changes, sale items and free shipping, market reports and new technology, and improvements in your customer service.

Summing it up

Getting started is the hardest part of expense reduction. Review your P&Ls and rank expenses from most expensive to least expensive.  Attack the largest expenses first.  Force yourself to cut some of those expenses. Apply common-sense to all of your decisions.

Entrepreneur magazine has sage advice: “. . . use outsourcing, delegation, systematization and automation to take low-level tasks off your plate and begin leveraging tech and [your best] personnel to focus on the most important aspects of your business” . . . generating new revenues while cutting operating expenses where possible. Remain calm, yet deliberate, as you prepare for the unknown future.


Gary Miller is CEO of GEM Strategy Management, Inc., a M&A consulting firm that advises small and medium sized businesses throughout the U.S. He represents business owners throughout the transaction process when selling their companies, acquiring companies and raising capital. He has been a frequent keynote speaker at conferences and workshops on mergers and acquisitions. Reach Gary at 303.409.7740 or gmiller@gemstrategymanagement.com.