As small-business owners scan the horizon, many see prospects of a bleak and uncertain future. With credit tight and sales slumping in a broad cross section of industries, they worry that 1991 will be a difficult and demanding year. In response, owners are searching for ways to cut costs, boost productivity and generally improve their ability to weather a recessionary period.
"At a time like this, the wise move is to reduce overhead," says crisis management expert Abraham Getzler. "Here's why that's so important. Assume ABC Co. had sales of $10 million last year, on which it earned a gross margin of 30 percent, or $3 million. If ABC's sales drop to $9 million this year, gross margins will drop to $2.7 million. In a weak economy, the best way to make that up is to cut costs."
That end in mind, consider this six-point program for battening down the corporate hatches:
*Pull back on expansionary moves initiated in more robust and optimistic periods. If you opened new stores or launched new products -- and these ambitious programs are still struggling to find a market -- this may be a good time to admit defeat, putting your pet projects on a back burner until the economy improves. The idea is to husband capital resources for use in the company's core business.
*If you've bent over backward to accommodate mediocre employees, giving them chance after chance to contribute to the business, this may be the time to dismiss those who have failed to produce. Paying salaries, bonuses and benefits to the deadwood in the ranks is a drain on the company's resources. What's more, it allows incompetents to monopolize critical positions, thus denying opportunities to more capable and motivated employees.
*Narrow your merchandise line to reduce the amount of money invested in inventory.
"If XYZ office supply company sells six different colors of pens, it has to inventory that many colors," Getzler says. "But if management examines the sales figures, chances are it will see that the black, blue and red pens sell very well, but the pink and green pens hardly move at all. Weeding the slow movers out of the line will cut the company's costs without seriously impacting revenues. For this reason, it's a good idea to go through the entire product line, reducing or eliminating those items that cost more to carry than they produce in sales."
*Prepare an accurate and realistic cash-flow projection. Use this as an advance-warning system to gauge your cash resources, enabling you to make provisions for additional capital when a shortfall is expected.
"One strategy is to project cash flow for three to five years, giving management a broad view of how the business may fare in the future," says Katherine Catlin, president of a management consulting firm that bears her name. "But because this is too unwieldy from an operational sense, management can use the first year of projections as the basis for taking immediate action. In this way, decisions made now have the benefit of a longer perspective."
*Sell or sublease excess office space you may be carrying as a buffer for expansion. Acquired in headier times, it can be an albatross when the economy turns down. Try these creative moves:
1. Consolidate operations into smaller quarters. Where supervisors have their own offices, have several share a single office divided by partitions.
2. Replace company-owned or leased branches with turnkey office suites that charge by the hour for such amenities as secretaries.
*Eliminate the luxuries you built into the business during the high-profit 1980s. These include first-class air tickets, luxury hotels, excessive use of overnight mail, liberal expense accounts and fully paid health-care plans.
"A cost-cutting plan is important because it gives you the means for dealing rationally and intelligently with the threat of recession," Getzler says. "Without this, you'll be reacting blindly to a downturn, throwing money at the symptoms of a troubled business rather than finding a cure for its ills. Too often this leads to a bankrupt company and a bewildered management wondering how things could have gotten so bad so fast."