Through our dealings with business owners, we’ve come to understand that each of these traits is essential when it comes to surviving – indeed, flourishing – during an economic downturn. The current fiscal situation is on everyone’s minds, and it is generally agreed that while the economy is not at its most robust, there is no reason why a well-run business cannot thrive with the help of thoughtful financial planning.
In keeping with the spirit of OPENBook, we would like to take this opportunity to present a comprehensive exploration of aspects of financial planning that are essential in the current economy. From exploring possibilities for diversification (including taking a look at expanding into overseas markets) to buying futures contracts that set guaranteed exchange rates against foreign currencies; from outsourcing certain areas of your operation to making moves towards minimizing energy waste – we offer suggestions to businesses of all sizes with input by our own Christophe Le Caillac, Vice President and Lead Financial Officer at American Express OPEN.
But first of all we would like to focus briefly on something that should underpin every facet of financial planning – a good credit score. No matter how much you and your business are affected by macro-economic factors, at a micro level you should make every effort not to default on payments. Be proactive about boosting your credit score and obtain your company’s report from one of the major reporting agencies such as Experian (www.experian.com), Dun & Bradstreet (www.dnb.com) or Equifax (www.equifax.com). Continue to use credit responsibly, and keep your personal and corporate accounts separate. The result will be confirmation of the old adage that credit comes where credit is due.
1. Foreign Affairs
With the dollar flirting with record lows against other currencies, it may be time to turn your business model upside down.
Today’s global economy has transformed business. We import from China, buy technology from Europe and have assembly lines in Mexico. It is no wonder that even the smallest businesses feel the sting when exchange rates make foreign goods more expensive.
Because the dollar has lost value against many world currencies (including a 15 percent decline against the euro between September 2007 and April 2008), the increased cost of foreign products is reason for growing concern for even the healthiest companies. Fortunately, there are a number of ways to minimize the impact of the dollar’s weakness and even to turn the situation to your advantage.
Understand the impact
The effect of foreign exchange rates is not always obvious. With supply chains that criss-cross the globe, there may be several currencies involved in manufacturing even the simplest product. But a good foreign exchange strategy should be as simple as possible. Start by asking yourself two key questions: Which of your inputs come from strong-currency regions, like the EUand Japan? And what would a 10 or 20 percent price increase from those suppliers mean to your business?
Armed with this knowledge, you can begin to evaluate alternatives from a new perspective. Is it possible – perhaps even profitable – to begin looking at alternative sources of goods and services? Are there domestic vendors that you may have overlooked previously based on cost? As the exchange rates shift, so should your sourcing strategies.
Hedge your bets
For companies that are inextricably linked to suppliers in Europe, there are two challenges: The poor exchange rate itself and the uncertainty generated by exchange-rate volatility. When foreign goods are priced in their local currency, uncertainty in exchange rates means uncertainty in pricing.
One strategy for alleviating that risk and uncertainty may be buying a foreign exchange futures contract. This can be done by using a brokerage transaction that guarantees you a set exchange rate. Any business that can predict payments to foreign suppliers can benefit from locking in rates in advance. “Be sure to work with a reputable company for foreign exchange since even small spreads in the exchange rate can translate to thousands of dollars,” says Christophe Le Caillec. “The idea behind a foreign exchange futures contract is to protect the margin you make on selling your product or service. It’s not about speculation.” Le Caillec adds, “It’s important to get advice from a trusted advisor such as your stock broker or banker to determine the most appropriate way to reduce your foreign exchange exposure.”
Of course, a similar strategy would be to lock suppliers into longer-term contracts priced in dollars. That, in effect, transfers all the foreign exchange risk to the supplier. While this option can be an attractive alternative, it may simply cause the supplier to further raise prices.
Turn the tables
Fortunately, every foreign exchange challenge brings an equal opportunity. These days, a weak dollar means that your goods and services are less expensive for foreign (especially European) buyers.
“This makes diversifying geographically an especially important strategy,” says Le Caillec. Large, untapped markets may exist for your product in Europe, where your prices are now significantly less than they were just a few months ago.
“Don’t be daunted by the opportunity to sell internationally,” he adds. “Fortunately, we are at a time when the Internet can play an amazing role in selling globally.” Thanks to online advertising, automated payment and quick shipping, selling products to a customer in Paris, France, can be just as simple as selling to a customer in Paris, Texas.”
For any business, protecting yourself from further exchange-rate inflation can be crucial – but the opportunity for new markets may make the current economy look brighter.
2. Growing Against the Tide
Strong leadership often requires aggressive action. Now is an ideal time to explore bold new markets and strategies for growth.
A company’s response to turbulent times doesn’t always have to be defensive: Sometimes the best plan is to push for sales in new markets and go for growth.
Of course, growing when those around you are shrinking takes gusto: It can mean looking at bold strategies like diversification, acquisition and international expansion. Or it could simply mean learning to think more creatively by providing solutions to your customers that will help maximize your value to them. There may never be a better time to explore the range of possibilities.
“Just as there are industries that have been negatively impacted – there are also those that are almost wholly disconnected from the larger trends, and some that are historically counter-cyclical,” says Christophe Le Caillac. “Unlock new growth by targeting customers in those sectors that are stable or growing.” Healthcare and energy are among those industries that tend to be less affected by macro-economic cycles. Entertainment is another that has, historically, shown growth during recessionary times (in fact the NDPGroup reports that sales of video games continue to break records – both consoles and game software sales were up 63 percent in early 2008 over the previous year). And then there is the government sector, a stable and largely untapped source of revenue for many small businesses.
It could be worth your while to explore how your business may be able to find customers in these industries as a means to weathering a financial downturn. One way of reaching out to a broader range of prospects could be to experiment with online marketing strategies, including email marketing and pay-per-click ads.
When industries are stagnant or shrinking, stronger companies will nonetheless have opportunities to increase their market share by acquiring their competitors. And a weak economy is the perfect time to spot opportunities. If a company’s finances are faltering but its customer base is intact, it could be an ideal acquisition.
Of course, purchasing can also be used to expand into new industries. But don’t stray too far afield. Good financial deals may not seem so great when the economy improves and you find that your acquisition is not a good strategic fit with your core business.
If you have strong customers in the U.S., chances are you’ll find equally valuable customers in other Western countries, and during a slow economy is a great time to explore options. The dollar’s decline against the euro means that American products will be more competitive from a price standpoint.
“The current situation is shifting to where the opportunities lie,” says Le Caillec. “Cover your back, but also look at where the opportunities are and where they are going. People who are exporting are doing extremely well at the moment.”
Goods and services from the U.S. have never been cheaper for customers in Europe and Japan. Now it’s up to you to find them and close the deal. Investigate the SBA’s office of international trade (www.sba.gov/oit/) or a U.S. Export Assistance Center.
Start closer to home
There are, of course, smaller steps you can take to reposition yourself without fundamentally altering your business model.
If your company’s sales are tied to consumer spending, and consumer spending is down, it might be best to focus your energies on finding new uses for your existing products, or selling upgrades to existing customers. Find new ways to win customers’ hearts during lean times and you’ll reap the rewards in improved customer loyalty when things turn around.
Whether staying close to home or venturing into new territory, those who face today’s economic challenges head-on by adamantly pursuing growth despite bleak forecasts may well come out ahead – and if we’re lucky, they may just bring the rest of the U.S. economy with them.
3. Labor of Love
Challenging economic times may cause you to evaluate payroll cuts. Stop short of major surgery and opt instead for a heart-to-heart with your employees.
Layoffs and downsizing tend to go hand-in-hand with uncertain economic conditions. When times are tough, one of the first places that companies look to decrease costs is their labor force. Small businesses need to weigh such cost-cutting decisions carefully as reducing the workforce too much can mean a loss of critical knowledge and skills. It can also leave a business understaffed when the situation turns around.
There is a delicate balance between optimizing staff and cutting costs, but it is not necessarily an either-or proposition. With careful and creative planning, it may be possible to do both. Here’s how:
Adding capacity does not have to mean adding employees: There are many opportunities to outsource a variety of business functions. Generally, the less visible the job is to customers, the more benefit there may be to outsourcing it. Functions like accounting, marketing, and even human resources can be safely assigned to companies or teams outside the four walls of your office.
Outsourcing can mean sending work down the street, or across the globe. There are ample opportunities to hire smart, reliable firms outside the U.S. to perform data-intensive tasks like accounting, customer service, database maintenance, and software development. International outsourcing firms have the twin advantages of being extremely cost-effective and performing a lot of work during the U.S. overnight or early morning hours, helping you accomplish more in less time. Agreat place to start an outsourcing search is www.outsourcing.com.
Keep what you’ve got
If you are wary of replacing staff with outsourced labor, negotiating may be a better option. Payroll has the reputation of being untouchable, but in difficult circumstances, employees have been known to take cuts across the board rather than face layoffs.
“Everything is negotiable,” says Le Caillec. “Offering employees options – including reduced work hours or additional time off – may be enough to keep current staff on board while still reducing payroll expenses by 10 or 20 percent. Of course, this is only a short-term strategy. Even the most loyal employees will expect their full salary back eventually.”
Remember, payroll is not the only expense associated with having staff. The cost of overhead – rent, phones and IT infrastructure in particular – grow in direct proportion to the number of employees physically present in the office. These same overhead expenses are ideal cost-cutting targets. A temporary move to a smaller space, or cutting some of your phone lines, can save big bucks in a hurry, and help you endure through tough times.
When cutting deep into overhead, consider taking your workforce virtual. Online tools make telecommuting more feasible than ever. Consider using a VOIP(voiceover Internet protocol) service such as Skype, Packet8, or AccessPoint, which can connect work-at-homers while also saving hundreds of dollars over a standard phone service. Web 2.0 tools like hosted exchange servers and Google Docs can make a virtual workforce even more productive than a typical office team.
Working from home is often seen as a valuable perk, actually making your culture more desirable to employees, as well as being a cost saving to the company. Many studies suggest that home-office workers may even put in longer hours since they don’t commute and are happier because they can spend more time with their families.
The heart and soul
Employees are the heart and soul of your business. As tempting as it can be to slash payroll costs during tough times, you’ll need those same resources to make a successful rebound. Rather than downsizing too quickly, evaluate the alternatives and find a win-win situation that leaves your company whole and your employees happy and ready to embrace the good times.
4. This Price Isn’t Quite Right
As prices for fuel and raw materials spike, smart business owners will take fast action.
According to the U.S. Energy Information Administration (EIA) the inflation-adjusted price of gasoline hit a new milestone in March 2008, when, at just over $3.21 a gallon, it became more expensive than at any time since World WarI. And when the EIAreported that the price of a barrel of oil passed $130 a few months later, it too set all-time-record highs and caused ripples throughout the economy.
Of course, the price of petroleum is not the only thing being affected. Crops like corn and soy are being doubly impacted by increasing transportation costs and a rapidly growing demand. Raw building materials like steel and concrete are also experiencing shortages and price spikes.
Inflation presents a real challenge for small businesses, but creative entrepreneurs can find several options for dealing with increasing prices, from passing along cost increases to curtailing usage.
Adding a surcharge
One of the most common strategies for dealing with volatile prices is to pass them on to customers in the form of surcharges. Fuel surcharges, for example, are common among delivery and service companies that rely on transportation. “The key strategy here is to separate the cost of the raw material – like fuel – from the underlying value of your product or service,” says Le Caillac. “Have your customers make the distinction between your value and the uncontrollable third-party costs like the costs of gas or steel or concrete.”
Eventually, if costs remain high, the price of the product or service will probably have to increase. But, in the short-term, a surcharge helps customers adjust to the new pricing.And since surcharges can be based on actual market conditions, a calculated surcharge can be built into a long-term contract as a way to share the risk with customers without seeming to raise prices.
Retool to reduce
Fuel prices in particular are driving companies and consumers to make difficult decisions in the areas of transportation and energy use. Fewer people are willing to commute long distances to work, and more are looking to purchase goods and services that are fuel-efficient or promise energy savings.
When it comes to conservation and cost-cutting, companies that take action now will be less susceptible to price hikes in the near term … and more competitive in the long run. “Take a look at all aspects of how you deliver goods and services to your customer,” says Le Caillec. “Is there an opportunity to move a distribution center closer to larger customers or to use alternative transportation?” With gasoline prices at record highs, the return on investment could be quite significant.
“Reduce, reuse and recycle” is not just an environmentalist mantra, but a great way to uncover cost savings throughout your organization. Challenge your staff to identify areas where raw materials can be reclaimed or reduced, and review your energy bills frequently. Two simple places to start are making the switch from incandescent and halogen lighting to compact fluorescent lightbulbs (CFLs) and using powerstrips instead of plugging electrical equipment directly into wall sockets. Also consider installing motion-sensor-activated lighting so that unused offices and conference rooms aren’t constantly ablaze. Encourage “paperless communication” – there are easily installable software counters that can keep a tally on how may pages are printed – thereby saving on printer wear-and-tear, electricity and paper.
Keep in mind the secondary effects of inflation. Higher fuel costs, for example, will have an impact on employees who commute by car. As the cost of living increases, employees will be looking to their employers to help them stay afloat. Keep a lid on wages by helping employees reduce their own costs: Encourage telecommuting (as discussed on page 4) or implement four-day work weeks where possible.
As increasing prices ripple through the economy, all aspects of business are likely to feel the impact. Creative solutions – and fast action – are likely to pay off sooner than you might think.