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December 30, 2008

Outrunning the Bear: Advice for Small Businesses in Dark Times

Outrunning the Bear: Advice for Small Businesses in Dark Times

Revenue Protect

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Summary

There is an old joke about two campers who stumble a   cross a bear in the woods.  Angered at being disturbed, the animal runs headlong at

There is an old joke about two campers who stumble a cross a bear in the woods.  Angered at being disturbed, the animal runs headlong at the campers. The campers turn and flee. The beast shows no sign of giving up the chase, so after a while one camper worriedly says to his pal: “I don’t think we can outrun this bear.” The other says: “I’m not trying to outrun the bear. I’m just trying to outrun you.”

Almost all markets have turned bearish of late. How should the small business react? Not panicking is a good start. However gloomy conditions may seem, they will be gloomy for competitors, too.

Downturns are the economic equivalent of Darwinism – a test where the fittest survive.  The primary goal is survival, especially for small businesses that lack a deep well of resources to help ride things out.  The secondary goal is living well, keeping strong and gathering the resources that will improve the chances of surviving any unforeseen problems that lie ahead.  Surviving hence means having a keen focus on all the advantages and efficiencies that may seem small in scale, but could make the crucial difference between the business that fails and the business that survives to enjoy the eventual recovery.

A good place to start is with some cold hard calculations.  What does your business need to do to survive?  Forget profits for the moment.  Cash is the lifeblood of a business.  Businesses disappear for the lack of cash, not for the lack of profits.  Think about cash, where it comes from, and where it goes to.  Think also about reserves of cash the business can draw upon.  Identify what the business needs to do to make the cash that will keep it alive for a month, 3 months, 6 months, and a year.  If things get really desperate you may need to shift timescales to weeks or even days.  Do not spend so long playing with numbers that you forget to actually run the business, but make sure you know what the cash targets are and keep them up to date as time passes and circumstances change.  Replace any existing business targets with cash-oriented versions of them wherever possible.  For example instead of paying commission to salesmen based on taking an order from a customer, pay commission based on the receipt of payments from the customer; this will encourage people to prioritize the best payers.

Once the cash baseline is understood, identify every opportunity to lower the baseline or make it more flexible.  Identifying opportunities does not mean acting on them immediately, as many of them will involve a trade-off between cash today and profit tomorrow.  But identifying the opportunities means you will be ready to take the pragmatic steps needed to keep the business running during its darkest days.  That advice may seem obvious, but even big businesses can struggle with this: the American automobile industry with its high fixed costs and over-reliance on achieving a high volume of unit sales is a very topical example.  To further understand and manage the baseline, consider the following questions:

If you have more room for movement, now may be a good time to make investment decisions designed to help reduce your cost base.  For example, heavy discounting may make this a good time to buy essential equipment instead of renting it, so long as you have the resources to cover the initial outlay.

To be continued in the 12/31 post “Beating Competitors in the Long Run”
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