5 Ways Small Businesses Can Survive the Downturn

The current economic downturn continues to create greater challenges for the small business owner. In working with small growing businesses, I have observed five common financial related issues with which they all seem to struggle. Although it is not uncommon for some if not all of these issues to exist in a small business, managing them over time is always critical to an owner's success in managing and growing his/her business. In this economic downturn, if these issues are not addressed in a much more timely fashion, some business will just not survive. The good news is that these issues can be resolved rather quickly. With focus, attention, and deliberate action, you can take control of your business future right now. Here are the five most important issues you need to address in no particular order.

1. No Cash Management
As we all know from operating a business, cash is king! It is the common denominator for all businesses NO CASH = NO BUSINESS. Other than the current cash balance (most of the time determined by looking at the bank’s balance) most small businesses don’t manage their cash. Cash management includes understanding your business “operating cycle” (i.e., cash out for inventory, inventory sold for receivables, receivables collected back into cash). To improve your “operating cycle” it is imperative that you understand what it means, how to calculate it, and what influences it before you can improve it. Many times I will ask business owners, “What do you expect your cash balance to be in 6 months?” Most of the time they reply that they are fighting cash flow problems today and can’t think about the future past this week. Managing cash flow in the months ahead is critical to your success!

2. No Credit Management
Many small businesses do not monitor the aging of their receivables closely enough. As invoices begin to age, the probability increases that the invoice may not be collected. Business owners should be reviewing their accounts receivable daily during these economics times. If an invoice becomes past due, take the opportunity to call your customer and ask if they are satisfied with the product or service. If they are satisfied, ask them when you can expect payment. Maintaining a good relationship with your customers is the key to getting paid on time. If there is a break-down in the customer relationship, and you see no other means to get your invoice paid, make sure you turn the account over to a reputable collection agency quickly to avoid a bad debt loss. A few days may make a difference on your ability to keep your own business afloat.

3. Poor Pricing Management
Setting the price of your products or services will drive revenues and, just as importantly, the “gross margin” for the business. Unfortunately, not enough time and attention is given to this aspect of business. In working with small business owners, I find that many have not revised their “pricing formulas” for some time. Others don’t really know their underlying costs and thus do not derive a sales price that provides much profit. Many products are market driven because of competition, but you can only lower your price to compete effectively if you know not only your direct costs, but all costs necessary to produce a profit. Gross margin analysis by product line, products or customer is critical for small businesses.

4. Lack of Timely and Accurate Financial Statements
In today’s business environment, decisions are made at a fast pace. Information is readily available via the Internet, yet internal financial information to improve the decision-making process is sadly deficient. Most business decisions have financial implications. Without basic financial information, any decision may be just a shot in the dark. Many times financial statements are put in a drawer and never reviewed because the information is too old (not timely), the business owner doesn’t believe the information is correct (not accurate) or the financial statements support the preparation of the income tax return, not running the business (not operational). They usually only become important when the business owner needs to meet with the bank. Your banker will be asking for updated accurate financial statements more frequently than in prior years. But, you should update your internal financial information every single week and use that data to help improve your decision-making process.

5. Overstaffed
One of the toughest decisions an owner has to make is to reduce headcount to align it with the level of incoming business. It is painful. In these economic times this tough decision often must be done in order for the business to survive. The natural attrition in personnel represents an opportunity. Do I need to replace this person now? Can I delay the replacement and delegate the responsibilities to someone else? Is there software available today that can make replacing this person unnecessary or that can make my staff more efficient in general? Are there other ways to keep my people employed that cuts costs but preserves jobs? Some creative ideas being used to keep staff on while reducing costs is to shift some full time staff to part time status and save on benefit programs. Job sharing is becoming more popular among staff who want to stay employed and are willing to share that FTE slot. Creative staffing changes can provide the opportunity for you to retain the good talent, you will need when your business rebounds after this economic cycle. Take time now to really look at your staff and the work they do. When you have to cut jobs, talk it over with your team and be open to creative alternatives.

As I mentioned at the beginning of this column, these challenges for the small business owner can be resolved with time, attention, and focus. Most of them are fundamental changes that are crucial now but that also affect your business success, no matter what the economic climate. As with most challenges and their related changes, awareness is the first step. Once you know what you have to do, the rest is up to you.

Glenn Wiltgen, located in Cedar Rapids, serves entrepreneurial growth-oriented small and mid-market companies. Glenn helps businesses in the Corridor region and he can be contacted at glenn.wiltgen@cfowiltgen. To learn more about Glenn go to his website at www.cfowiltgen.com