In hard times, small businesses face reduced income while costs will stay fixed or increase


December 31, 1990|By Graeme Browning

Of all the survival skills a small business needs in economic hard times, the ability to keep cash flowing regularly is the most crucial.

"In a tight economy, the essential is business survival. Your goal must be to withstand and survive the crunch and be in a position to take advantage of growth when the economy changes to the positive," said Louis G. Hutt Jr., a lawyer and accountant whose Columbia accounting firm, Bennett, Hutt & Co., specializes in management support services for small businesses and professionals.

In tough economic conditions, sales are usually flat but costs are increasing, Mr. Hutt said at a recent seminar, "Managing Your Cash Flow in an Uncertain Economy," which was part of a conference for small businesses sponsored by the Maryland Department of Employment and Economic Development and the Maryland Small Business Development Financing Authority.

When an economy contracts and sales decrease, "small businesses often don't have the flexibility to reduce fixed expenses and debt service, which places much greater pressures on the amount of cash generated," Mr. Hutt said in an interview expanding on his remarks at the seminar.

The first thing a business owner needs to measure is just how "uncertain" the economy is, Mr. Hutt said.

"There are certain factors you should definitely track in order to project where your business will be in the next quarter, the next year and the next two to five years," Mr. Hutt told his seminar audience.

A drop in consumer spending, a rise in governmental deficits and a growing number of business failures in major industries and among major employers should put any business person on notice that the economy is faltering, he said.

Other factors to watch include whether interest rates are volatile (indicating attempts by the Federal Reserve to adjust the economy); whether the government is proposing new taxes (to boost government income); whether credit is tight (meaning lenders are becoming fearful about the economy, and, thus, more conservative); and whether your industry is changing significantly.

"If you own a fast-food restaurant and you see McDonald's introducing a discount, for instance, you should be asking yourself 'Do they have a decline in customers?' or 'Are they facing greater competition?' and, if so, how should your company be positioning itself?" Mr. Hutt suggested.

When all of those factors point to a sagging economy, your business plan should refocus on four priorities -- increasing sales, moving surplus inventory, making use of excess capacity and making efficient use of cash generated from operations -- he said.

At the seminar, three of Mr. Hutt's clients also offered suggestions born of their own business experience to flesh out Mr. Hutt's advice.

The three were Charles Washington Jr., president of the Washington Harris Group, a Washington-based consulting firm; James Robinson, president of Columbia Associates, which franchises hair salons; and Dennis Whitaker, president and founder of Whitaker's Flowers Inc., a nursery and garden center in Howard County.

Special pricing strategies, for example, give consumers the perception that they are getting "more value for their scarce dollars," Mr. Robinson suggested.

Columbia Associates' salons draw customers with a one-time coupon, then, once the customer is in the salon, encourage her return by offering a coupon book for additional discounts, he said.

The amount of the discount in the coupon can be difficult to estimate, however. "You have to have find that happy medium where you bring people out but don't lose your shirt. A 5 or 10 percent discount may not be worth it to some customers," Mr. Robinson said.

Mr. Whitaker noted that he often puts plants together in specially priced packages for "beginning landscape artists" or for the seniors' discount day he holds every Tuesday.

"The No. 1 thing is to remain competitive, because your biggest competitor will be doing the same, believe me," he cautioned.

Service businesses may want to consider offering a fixed-price contract rather than billing by the hour or day, Mr. Washington said.

"Our customers like these contracts because they feel they're actually getting a discount. To some extent they are, because if we're not careful we run into glitches that we have to swallow, cost-wise," he said.

Another strategy to consider is shifting production and marketing to lower-cost items, "which do better in hard times," Mr. Hutt said.

An example of that strategy at work, he noted, is a well-known furniture manufacturer that is focusing on upholstered and unassembled products for 1991 because those sell more quickly in a weak economy than the company's signature carved wooden furniture.

It is also important to scrutinize business practices and policies that might cause leaks in your cash flow -- some companies pay managers bonuses based on how well they manage cash, Mr. Hutt said -- and to try to minimize your company's normal collection "float."

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