I invested in my first business in 1999. Over the past 21 years, I have owned businesses through 3 major economic downturns, which I personally label – “Dot Com Debacle,” “Liquidity Recession,” and “Corona Shutdown.” Each of these down cycles has helped me to sharpen my pencil as a business owner and become smarter about how to manage in challenging times. Here are five important lessons learned that I would offer as advice to fellow business owners working through this challenging cycle.
Lesson #1 – Cash will always be king
As a business owner, advisor, and teacher for more than 20 years, I cannot possibly overstate the importance of cash. It is absolutely, positively, the #1 concern of successful business owners. Cash is the lifeblood of any business, and knowing your cash position today and the ups and downs over the next 90-180 days is essential to your (1) survival and (2) success.
Managing cash, particularly in a downturn, is different than managing profitability. Cash is consumed in a variety of ways that have minimal impact on profitability, including loan payments, investments in inventory, collection of slow-paying accounts receivable. If you have not already done so, you should immediately prepare a monthly cash budget that shows your cash ins and outs. Use this as a tool to better manage cash.
In addition to knowing your numbers better, I would also recommend that you set up some cash safety nets for yourself. This will include you building a larger cash balance in your business. I would also recommend that you set up a working capital line of credit with your bank to provide additional, short-term liquidity to help you weather short-term cash storms.
Lesson #2 – “A Penny Saved is a Penny Earned”
This adage is as true today as when Benjamin Franklin shared this pearl of wisdom more than 250 years ago. From a business owner’s perspective, this means you need to be concerned about ALL your expenses and manage each of them carefully.
As a business owner, I go through an annual planning process for each company that I own. During this process, I work with the leadership team to set goals and priorities for the following year, including financial and operational objectives. One part of this process involves a detailed look at every line item on our income statement to determine what opportunities there are to reduce operating expenses and improve margins. And the little items count! What if you could reduce telecom expenses, office supplies, shipping supplies, and insurance costs by 10% next year? That is REAL MONEY! And generating a 10% reduction is not unreasonable in most expense categories.
By keeping a focus on managing your expense categories carefully, you are going to be able to improve margins and conserve cash every month without having any negative impact on your business! That is the objective of saving your pennies.
Lesson #3 – Diversification Saves the Day
In my role as a professor at Carnegie Mellon, I have worked over the years with a multitude of start-up and early-stage companies. Many of these companies begin with a business plan that centers around a single core customer with plans to diversify as the company matures.
For a start-up venture, this is an understandable business model but one that is packed with risks. Having a limited customer base (1 in the case of some start-ups) or even a tight focus on an industry segment creates significant risks in the business. Consider the impact on revenue over the past six months if you owned a business that only repaired fitness equipment for gyms. With gyms closed or limited in capacity, your revenue stream would be dramatically impacted. But, if your company also serviced other mechanical equipment for industrial facilities or distribution facilities, the impact on revenue would likely be more muted.
As a rule of thumb, revenue concentration of 20% for a single customer or 40% within a single industry segment is a large risk to your business. I would encourage you to make efforts to diversify your revenue stream over time by adding new customers in diverse business segments.
Lesson #4 – Identify your Critical Employees
At the start of the “Corona Shutdown,” I had conversations with multiple business owners whose revenue had declined dramatically and were focused on eliminating some jobs. The question that we discussed was, “Who do I keep?”
My recommendation is that you focus on employees who are (1) in leadership roles, (2) capable of performing multiple tasks, and (3) signaling to you a long-term commitment to your business.
If you develop an employee retention methodology around these three core characteristics, you will be able to create a team that can help operate at a diminishing capacity today but will also be able to serve as the foundation of more growth as your business recovers.
I also want to share a thought on the timing of layoffs. Though it is one of the most difficult decisions that business owners need to make, it is crucial for the long-term viability of the business to act quickly and decisively when layoffs are required. If you have determined that your business is overstaffed, the time to reduce team size is NOW. Each day that you delay creates cash weakness for the business and increases the anxiety of employees who know that the business is struggling. Leading decisively is essential, especially on employment-related issues.
Lesson #5 – Marketing is a Long-Term Investment
This will be the most difficult lesson to accept, but I swear to you from the bottom of my heart that it is true. In down cycles, you must continue to execute a marketing program. The benefits of this action are massive and can create a gigantic long-term advantage.
To be clear, I am not advocating that you spend marketing dollars in the same fashion as when you initially opened your doors. But what I am recommending is that you continue to build your brand name by engaging current customers and prospects through lower cost, frequent messaging to keeps you on the top of their mind. Why? Because it will allow you to stand out in the field and will build a strong association with your business.
When the economy is flourishing, you can spend a mountain of money on marketing and have your message drowned out by all the other marketing that your competitors are also sharing.
Right now, many business owners are scared to spend money. As a result, the brave folks who continue to spend on marketing are seeing massive success. The message is getting throughout without clutter, and the customers are building a strong association with your brand that will have a lasting impact.
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