Batten Down the Hatches

If you act now, a downturn doesn't have to mean disaster

It has been 16 years since Katie B. Tyler struggled with her first economic slowdown. But she remembers it like yesterday. ''It hit me broadside,'' says Tyler, the 49-year-old owner of Tyler II, a Charlotte (N.C.) interior construction company. ''Business just stopped.'' Panicking, she cut her salary in half and drained the company's cash reserves to scrape by.

So with the outlook for 2001 uncertain at best, Tyler isn't taking any chances. She has already talked to her bank about doubling the 24-employee company's line of credit to $1 million, increased her business development budget by 50%, and promoted her office manager to client-relations manager to make sure current customers remain satisfied. Plans for a new $1 million headquarters could be postponed. ''I plan to stay on a steady course and not panic,'' says Tyler.

It's getting harder to keep a cool head, though, as hardly a day passes without another ominous economic cloud floating by. Jobless claims are edging upward, energy prices are spiking, and retail sales and consumer confidence are down. The impact on small business is plain. In the fourth-quarter Trendsetter Barometer survey by PricewaterhouseCoopers, chief executives of high-growth companies said they had reduced revenue growth targets for 2001 by an average of 7%. And the December survey of the National Federation of Independent Business found that only 14% of small-business owners said now was a good time to expand, the lowest number in more than four years (chart, page F.10). ''The small-business sector is clearly slowing down,'' says William C. Dunkelberg, the NFIB'S chief economist.

Downturns almost always hit entrepreneurs first and hardest, economists say. With smaller cash reserves, less access to credit markets, and less geographic diversity in global and domestic markets, ''small businesses have much lower tolerance to weather a downturn,'' says Wesley W. Basel, senior economist for Inc., a West Chester (Pa.) economic consultancy.

For William J. Carnegie, CEO of Total Containment of New York Inc., a specialty contractor, the slowdown is already six months old. He founded Total Containment in 1993 and saw sales grow at least 30% a year. But in 2000, revenues plunged some 40% as clients started putting contracts on hold or missing payments altogether. So far, Carnegie seems to be making the moves experts recommend. He hired a collection agency, laid off two of his approximately 50 employees, doubled his bank credit line to $1 million, and secured $350,000 in emergency funds from an investment banker. Meanwhile, he's seeking higher-margin jobs and organizing his work better to reduce downtime at construction sites.

Of course, those gathering clouds could have a silver lining. For some entrepreneurs, a slowdown means a chance to snap up talented workers. Ilya R. Talman, president of Roy Talman & Associates Inc., a Chicago-based high-tech recruiter, expanded his recruiting staff from 12 to 19 people in the fourth quarter. ''We have seen a dramatic upturn in our ability to hire in the last few months,'' says Talman. A downturn also could present opportunities, especially for small companies, which can react rapidly to new circumstances. ''You can't turn around the Queen Mary quickly, but you can turn around a kayak very fast,'' says David L. Birch, an economist and president of Cognetics Inc., a Cambridge (Mass.) research firm.

On the other hand, a kayak isn't much use if it's sinking. That's why entrepreneurs need to take a long, hard look at their cash flow, operating costs, and overhead, says A. Lynn Daniel, president of Daniel Group Ltd., a strategic planning consulting firm in Charlotte, N.C. Perhaps it's time to lease or rent, rather than purchase, new equipment. Instead of hiring a full-timer, consider temporary workers, outsourcing, or a strategic alliance with another company. And don't let accounts receivable languish.

Entrepreneurs also should secure an adequate line of credit before an emergency hits, says Mike James, corporate executive vice-president at Wells Fargo & Co., the nation's largest small-business lender. ''As the economy slows, banks tighten up,'' he says. But beware of heavy financing costs, consultants and economists say. Such expenses have killed many high-growth companies. Donald J. Mayer, the 51-year-old CEO of Small Dog Electronics in Waitsfield, Vt., a 13-employee Internet reseller of Apple computers, learned his lesson. He lost one computer reselling business in the early 1990s because he expanded too fast and couldn't support his bloated overhead with falling sales. Now, Mayer has a profitable, self-financed business that had been growing up to 40% a year since its founding six years ago. With a slowdown likely, he plans to lower his expectations and ride it out, rather than take on debt.

Mayer and other entrepreneurs also plan to identify new market niches, particularly ones that are recession-proof or enhanced by a recession. Matthew M. Zell, president of Prometheus Technologies Inc., says his Chicago-based information technology consultancy is moving into IT due diligence to capitalize on a likely increase in mergers during a recession. Indeed, rather than fearing a slowdown, Zell is looking forward to it. With the labor market so tight for so long, Zell, 34, has seen his profit margins eaten away by steadily rising wages. At the same time, he has been unable to discipline problem employees who can find a new job in a matter of days. ''What's happened has been pretty brutal,'' he says. ''I am not sure a recession would be tougher.'' Perhaps. But entrepreneurs will need to be just as disciplined themselves.


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