With nearly a decade of strong economic growth seemingly drawing to a close, many small-business owners are ill-equipped to ride out a slowdown. Some have only operated during boom times, others have grown sloppy, and still more have been able to deny trouble until it's too late. "Until entrepreneurs feel the pain, they don't want to take the action," says Ray E. Silverstein, head of President's Resource Organization, which is based in Chicago and advises entrepreneurs. "Most small businesses don't do an adequate job of planning."
In a less certain economy, lack of planning isn't an option. Entrepreneurs should take immediate steps to keep their companies afloat in stormier economic waters. "They need to put in a lifeboat now, not when they are facing a financial crisis," says Pete R. Collins, director of entrepreneurial services for PricewaterhouseCoopers.
Here's what business consultants suggest entrepreneurs do to prepare for a slowdown:
-- Evaluate cash flow to determine whether your company has enough of a buffer in the event that sales or profits dwindle. Cut expenses and put aside a cash reserve if possible. In a downturn, "cash is king," says Silverstein.
-- Prepare additional lines of credit for emergency funds.
-- Take a look at your loan covenants and terms of debt financing. You might convert short-term debt to long-term debt and renegotiate loans that have fewer restrictions to give you more flexibility. But beware of heavy financing costs, which have killed many small companies.
-- Analyze your overhead costs. Determine where you can cut -- starting with staff that could be replaced by temporary workers. Also consider the potential savings to be found in outsourcing, and in forming alliances with other companies.
-- Postpone capital expenditures in order to reduce debt and increase cash flow. For example, entrepreneurs can lease or rent office space instead of building, and lease office equipment rather than buying.
-- Slow the growth of your firm. "Don't expand aggressively at the end of an economic expansion," advises William C. Dunkleberg, chief economist for the National Federation of Independent Business. "Now is not the time to double the size of your firm, when your customers might disappear."
-- Watch your inventories and accounts receivable. Don't let excess inventory and slow-paying customers hurt your cash flow. Hire a collection agency if necessary. Improve your accounting systems to manage inventory and other costs.
-- Determine your best and highest-return customers. Weed out marginal accounts and concentrate on the cash cows.
-- Look for market niches that do well in downturns as you diversify your customer base. Some parts of the economy actually do better in a slowdown, or at least are less hard hit.
-- Analyze employee productivity. Find out who your most productive employees are and hold onto them. Consider getting rid of the least productive workers if you are forced to make cuts. Cross-train good employees.
-- Take advantage of a looser labor market to hire talented employees.
-- Think fast. One advantage of being small is the ability to react quickly to new circumstances. Large businesses often lose market share during a downturn, giving entrepreneurs an opportunity to increase their slice of the pie, says David L. Birch, head of Cognetics Inc., a Cambridge (Mass.) database company.
Above all, keep a close eye on the economic horizon and don't make any reckless moves. "Don't panic. Just pay the bills," says Dunkleberg. After all, irrational exuberance got the better of many entrepreneurs during the boom. Don't let irrational pessimism cripple you now.
By Janin Friend