With the imminent passage of another mega-stimulus package of nearly a trillion dollars, one thing is for sure: If you are one of the 58.6 million people who work for, run, or own a small business – there won’t be anything in it for you. And that’s a real problem; not just for you, but for our entire economy.
Small businesses (those that employ fewer than 500 people) account for 99.7% of all employers in this country and collectively contribute more than half of nonfarm private GDP. Small businesses employ nearly half of all private sector employees and create almost 80% of all new jobs. With nearly 23 million small businesses located in almost every neighborhood in the United States, it is small businesses, not the behemoths being bailed out, who are the true backbone of the U.S. economy.
While it seems unlikely that the powers-that-be will shift their focus from those with the most lobbying muscle anytime soon, whether you own a Mom-and-Pop neighborhood shop or manage a mid-market multinational, the following advice should help you remain solvent (and perhaps even prosper) as the economy continues to struggle over the next few years.
1. Become Commander in Cheap. Those companies that prove best able to survive – and thrive – when times are tough tend to have the same thing in common: They live by the mantra that Cash is King. Whether you are the CEO of a major multinational, or the sole owner of a small store in the suburbs, if you have not already done so you need to take immediate and complete control of your cash. Before you even finish the rest of this article, fire off a memo that imposes a complete moratorium on all future spending. Nothing goes out – not a nickel – without your name on it.
Lest you think this exercise will result in saving nothing more than a few pennies here and there, consider this. In 1921 the business journal Administration reported the case of a particularly penurious executive who spent an evening sorting through the waste-basket of a randomly selected employee. In the course of his perusal he came across, among other precious items, a dozen discarded clips. Big deal you say? Well, our economical executive extrapolated, if every one of the 47,000 persons in the company were to waste just one of these thirty-five cent clips per day, “in a year enough money would be wasted to buy a big twin-six Packard car.” At twelve clips each, the $197,400 he discovered in 1921 would still be a significant amount today (let alone in its equivalent of $2.3 million in 2009 dollars). Far from being an anomaly, in my ten years of working with organizations of every size I have come to discover a nearly universal truth: for every eight employees, the average organization wastes at least the equivalent of one employee’s annual wages every year.
And before you start to worry about how little time you already have without adding President of Penny Pinching to your title, let me offer a consolation. I have worked with some of the biggest, most sophisticated, most far-flung companies on the planet – and I can assure you that no matter how large or complex your small business may be, a simple process can be developed that lets you see every cent being spent in less than an hour a day. Even if you have multiple departments, divisions, locations, and managers, you can create a remotely accessible spreadsheet (complete with a column for your yea or nay), to stay fully connected to your cash. And if you really want to get creative (while at the same time proving to your employees how serious you are about waste management), drop me an email and I’ll send you directions on how to set up a simple system you can use for free.
2. Squeeze Water from a Stone. In addition to the considerable gains to be had from controlling costs, you can likewise dramatically improve profitability by taking a singular and deliberative approach to maximizing margins, controlling overhead, adopting more sophisticated pricing strategies, and more aggressively managing your cash flow.
Maximizing margins is one of the most often overlooked, and yet most financially rewarding practices a small business can engage in. Think of your Cost of Goods (or Services) Sold as the number of holes in the bucket you carry your profits home in. The higher your COGS/COS, the more it’s like trying to carry water home in a sieve. Plugging the holes allows you to keep more of what you bring in. By getting aggressive and dissecting each of the constituent elements of your per-unit costs – line-by-line, item-by-item – you will be surprised at the savings you can find; even if you re-repeat the process every few months. As a consequence of the multiplier effect, squeezing pennies out of a repetitive process, or single digit percentages from big-ticket services, can dramatically change your variable costs. Somewhat paradoxically, when business is slow it may also be to your advantage to consider actually increasing your COS/COGS. By shifting fixed Service, General and Administrative (SG&A) expenses to a more variable-cost structure when production is low, you may be better able to control costs while decreasing overhead commitments.
Controlling overhead by aggressively reducing your Service, General and Administrative costs can similarly – and profoundly – improve your bottom-line. SG&A creep is an insidious phenomenon that may well be the leading cause of business death in the United States. Think of it as corporate cholesterol. When times are good, businesses tend to develop expensive tastes and incur costs that tend to be too rich for a healthy diet; things your company doesn’t really need and that are not good for you anyway. These rich delicacies range from redundant newspaper subscriptions and professional memberships on one end of the scale, to the executive perks and labor concessions that have killed entire American industries on the other. In tough times you need to use the equivalent of a prescription strength corporate statin and rid yourself of those nasty plaques that are gumming up the works, reducing your monetary efficiency, and hardening your financial arteries. Your new standing orders have to be that everything not essential to your short- and medium-term success has got to go – stat.
Pricing strategies are one of the most often overlooked sources of free money in the small business universe. While most companies tend to take what amounts to a Ouija Board approach to determining prices, more sophisticated pricing strategies based on data you likely already possess can increase your income significantly, and literally overnight. While beyond the scope of this brief article, understanding the buying patterns of your customers can show you how raising the price of this item by just a nickel, and that one by fifty dollars, will help you actually gain customers while leaving less money on the table – and putting it in your pocket, where it belongs.
Cash flow management is another essential piece of the puzzle in your efforts to wring moisture out of marble. The Cash Conversion Cycle – a concept too often ignored by all but the biggest boys on the block – is another way to substantially improve profits without making even one additional sale. That said, if concepts like Days In Inventory (DII), Days Sales Outstanding (DSO), and Days Payable Outstanding (DPO) sound like Latin, you need to have a serious sit-down with your accountant – or, if you prefer, drop me an email and I will send you a plain English explanation. Either way, this is not one of those things you should leave to your bean counters to figure out. Cash flow decisions are a strategic, and not simply a technical or financial decision; and the decisions you do make regarding your cash management can save (or cost) you quite a bit.
While most business leaders focus obsessively on sales, surprisingly few give sufficient attention to how much of what is brought in is actually kept. Dissecting the sources of your costs and improving your internal practices can return considerable dividends, even for the most conscientious of companies.
Whatever your eventual decisions on how to best manage, reduce, and structure your internal expenses and cash flow, it is important that you make an informed decision based, if possible, on the advice of an external objective expert. As well intentioned as you or they may be, the proximity to the problem usually makes it unlikely that someone inside the organization will see the sources of significant scleroses that had, by definition, previously gone unnoticed. The minimal costs of having an expert diagnose your operations and benchmark your financials against others can payback dividends – sometimes in just a few days.
3. Focus on the Few: What Vilfredo Pareto first proved at the turn of the twentieth century is just as true today: 80% of effects tend to come from 20% of causes. What does this mean for you? As mountains of research have consistently shown, most of your profits tend to come from a minority of your customers, services, and employees. Your mission (should you choose to accept it), is to find and capitalize on those hidden treasures. Which customers should you be lavishing attention on – and which should you be inflating fees for until they either become profitable, or decide to help another firm lose money? Contrary to popular belief, not all customers are created equal. Can you identify those who are the most profitable (and understand how to get more of them), versus those who demand an inordinate amount of your time, attention, and overhead costs for what proves to be an inequitable return? And what about your employees? Who are the shining stars – and who are the black holes you might be better off without? By strategically relocating your poorest performers to the competition you may be doing yourself a significant service.
The strategy of separating the best from the rest applies equally to every aspect of your organization: distribution channels, product lines, and even your overall strategy. In every company, no matter how small and simple or large and layered, focusing on the “critical few” will help you begin to turn things around almost overnight. When you focus like a laser beam on those things that matter most, you will be astounded at how quickly your bottom-line improves. Your strategy for success: forget the rest, focus on the best. By ruthlessly ridding yourself of everything that doesn’t get you closer to your goal you’ll have plenty of time to look for rainbows after the storm has passed.
4. Draw Deeper and from Different Wells. Consider your core competencies. Is there something your company does exceptionally well? I hope so. Now consider a question you might need to read more than once: What is it you do that enables you to do what you do so well? Huh? In other words, What is it your company does (invoice processing, call center operations, equipment repair, etc.) that supports your ability to succeed in your primary line of business?
Whatever your business, there is bound to be something collateral that you do well to support your success. So here is the big question: Is there some way you can capitalize on these collateral capabilities to create an adjunctive or alternative revenue stream? If your answer is no, keep looking. In my experience, even the corner quickie mart does something in support of their primary business that would be valued by someone else. Think B2B, B2C, or LMNOP. There has got to be something you can do with what you already have to bring in a few more bucks.
And while you are looking, also consider those with whom you are already doing business. Vendors, suppliers, colleagues and customers can all be conduits to additional income. Pick their brains, conduct a survey, read tea leaves if you have to. Assume there is more business to be done and money to be made and assign yourself and everyone who works with you the responsibility of finding it. Sales are not just for salespeople; the best representatives of your company are you and the other folks who are actually doing the work.
5. Partner Up for Profit. There is an old psychological experiment they used to have students do. The Professor would send his students to the mall with the simple instruction to think the way they would if they were paranoid. What would you think about the woman who handed you that hot dog, or the guy helping you on with that new coat? The reason we don’t do this experiment anymore? Within just a few minutes, most people start to actually become paranoid – some, dangerously so. Don’t believe me? Please do – and don’t try it yourself.
The moral of the story? If you think paranoid, you become paranoid. But if you think partnering . . . Partnership opportunities abound in modern business, but all too often are ignored. Here are a few for you to consider as you put your company back on track:
Big companies call it co-opetition; you can call it what you like. By partnering up with others (even those you might otherwise consider competitors) you can realize opportunities that might not otherwise exist.
Consider the example of Larry’s Liquor Locker (a small business I just made up). By partnering with the stores owned by Harry, Mary, and Gary, can our old pal Larry increase his purchasing power? Of course he can. And while the combined economies of scale these partners realize will advantage all, who is really hurt? Sure, the supplier may have to make concessions – but our little consortium of liquor store owners are all better off. Buying cooperatives and barter agreements have been around for thousands of years. Isn’t it about time your small business formed its own?
Speaking of partners, the one’s you should turn to first are those you already have. If you have not already done so, you need to change the relationship with your employees from one of boss/worker to professionals whose interests are fully aligned. You need to remind everyone you work with that all the sales in the world won’t do any good if your per-sales profits are not what they should be. You must instill an ownership mindset in everyone in your organization so everyone you work with, from the custodian to the CFO, treat your company as if it were their own – because, truth be told, it is.
6. Share the Pain. When it comes to financial difficulties, stoicism is highly overrated. The owners and managers of small businesses typically wait way too long before they finally admit they may be in trouble. At your first indication times are getting tough you should do yourself a favor and sit down with several of your key constituencies. It may be painful, but believe me – it will pay dividends in the long run.
First and foremost, you should talk to your family and friends. You are going to be under inordinate stress as you attempt to navigate the challenges you will doubtless encounter as you navigate the turbulent times that lie ahead. Asking for the support, patience, – and perhaps a little space – from the people who are closest to you will provide much needed mental maneuvering room.
Once the family and friends are taken care of, you need to have a conversation with the company. Whether you have one employee or several hundred, you, the Big Kahuna, need to be the one to look them in the eye. Don’t hesitate to let them know that times are tough, and just how tough they are. Even if you’re not a fan of open-book management, you should take the time to quantify just how the company is doing. Describing your status on a scale of one to whatever, with clear descriptions of each of the anchoring ends (1 is Bankrupt, 10 is Big Bonuses for Everyone – and we’re at a 3) will give you the ability to quickly and clearly communicate just how dire things are. Continual updates will also allow you, and everyone else in the company, to track continued progress toward your goals. Is it possible that some folks will be frightened, and some may head for the hills? Yup. And good riddance to those who do.
The final groups you should consider meeting with when things start to really get rough are your vendors and customers. If you need their patience, if you would both benefit from alternative accommodations, ask. It is always better to prearrange changes to your relationship than to spring it on them when there is no longer any choice. If you have been wowing your customers with the intangible aspects of your services all along, you’ll be amazed at how forgiving they will be.
As the economy continues to decline your vendors may also be increasingly receptive to forbearance agreements and alternative payment arrangements, particularly when they help ensure your continued solvency. In this economy you should remember that your vendors are likely to be as interested in keeping business (and keeping their business in business) as you are. Which brings us to your next new rule: All vendor agreements are renegotiable. Do not take even long-time agreements for granted. As anyone who has ever bought a rug at a Middle Eastern bazaar can tell you, the price is never the price. If you’re not good at negotiating, get good – fast. It will end up saving you a fortune.
7. Ask for Help. Managers and owners of small businesses too often suffer in silence, even as the walls come tumbling down around them. Do yourself and your business a big favor and don’t wait until the Huns are coming over the hill before you seek out help. With the hundreds of hucksters that always seem to be waiting in the wings to bilk business owners, I can appreciate the hesitance that often comes in finding someone to guide you through troubling times. But in the same way crooked lawyers, car dealers and doctors don’t stop us from suing Buicks for malpractice, when your business is in dire straits (or any other rock band), you need to get professional help. In addition to having capabilities you may not posses internally, external experts have an advantage of perspective the people in your organization are unlikely to posses.
While I can’t speak for others (and at the risk of sounding self-promoting), over the past ten years I have never yet encountered a company that hasn’t been amazed (and mortified) to discover how much money they have been leaving on the table and flushing down the drain. The minimal cost of a competent professional could be the best investment you will ever make. So do yourself a favor and don’t be afraid to ask for help. Even if there is nothing more that can be done, at least you won’t have to end up second-guessing yourself sometime down the road.