Be a Miser with Expenses, a Hog with Savings

Follow this common sense approach to running your business and do a better job of weathering the next recession

You would think there wouldn’t be a need for recession planning. We should see the economic slowdowns coming. The constant wave of business cycles makes recessions as inevitable as surging booms.

The exact timing of recessions is darn near impossible to predict. Still, like hurricanes, recessions come along once in a while, and occasionally one will wreak havoc on your business.

Seasonal retailers can teach us a lesson on how to weather recessions. There’s a small business around the corner from me that sells swimming pools and backyard leisure items in the summer. When seasons change their business needs, you can bet that their display changes to snow blowers, wood stoves and chain saws in September, and Christmas trees in December.

Recessions come as regularly as seasons, just not as often. Businesses should be prepared for them, so here’s a guide for businesses to handle recessions and the inevitable boom that follows.

BACK TO BASICS

When you get right down to it, handling recessions, or any kind of business slowdown, consists of three things:

• Cutting expenses as much as possible without affecting sales and income.

• Maintaining sales and income as much as possible in the current environment.

• Having and properly using an emergency fund to help weather the storm.

Recognizing the basics and implementing a plan can be two different things. Here’s how to start:

Understand the financial ebb and flow of your business. You should be using a computerized accounting system. Quickbooks is the premier system right now. If you have an accountant, he or she is probably using it. If you’re using an old paper system and doing your own bookkeeping, your first task is to upgrade immediately. Buy the software and take a course in using it. They are available online, as well as in classroom settings.

Your primary tools are found in the company “financials,’’ “sales’’ and “customers’’ sections of Quickbooks. You will use three primary tools:

Profit & Loss Statements, or P & L. The program will allow you to see all your expenses and income — categorized — and tell you if you’ve made a profit or suffered a loss during that time period. Run the P & L as far back as you can, five or 10 years if possible. Do it for each quarter and annually. You will be able to tell what period of time is most profitable, when expenses rise, what the expenses are, when income increases, and in what categories.

Sales and representatives. If you have a sales force, the sales section of Quickbooks shows sales details by individual representatives. This will tell you who’s doing the best job and who needs improvement.

Customers and invoices. The customers and receivables section of Quickbooks will show you open invoices and accounts receivables details. You will know how long it takes to get paid and the number of outstanding invoices for each period. This is crucial because the time it takes to collect has a direct impact on cash flow.

START PROTECTING YOUR BUSINESS

Once you have this information at your fingertips, you’re ready to begin recession-proofing your business.

Cut expenses. A wise businessperson should be doing this all the time. Trim only the fat, and beware of cutting things that bring in revenue. The first step is to scrutinize the expenses part of your P & L statement. Take steps to reduce obvious expenses that can be lowered. Save energy costs through efficient windows or insulation, eliminate superfluous purchases, drop inventory or services that aren’t profitable.

Scrutinize advertising spending. Be careful to differentiate between crucial advertising that brings in business and that which doesn’t. Ask customers how they heard of you. Offer coupons that must be brought in so you know the source of the customer. Record the answers and use it to manage your advertising budget.

Make sure everyone is pulling their weight. Closely examine the performance of each employee. In a recession, you may be forced to retain only key workers. Be ready, have the decisions made ahead of time and hope the dark day of layoffs never comes.

Watch your cash flow in good times. Business is good, money pours in. Why get crazy, right? So collections are behind and expenses are too high? Profits are still good, so why bother? This relaxed attitude explains why so many businesses fail during recessions. There are many dangers of financial complacency, and when economic slowdowns occur, the business is blindsided.

Collections are abominably slow, expenses are high and it’s a scramble to get rid of bad habits developed during economic booms. Pretty soon the “Going Out of Business” sign appears on the door. Straighten it all out during the good times, just when you think you don’t need to — because you really, really do need to.

Set up an emergency fund. If you do nothing else, start putting 10 percent of gross revenues in a ready, liquid fund tied to your business. Use a good, steady bond fund like Vanguard Intermediate-Term Tax Free Municipal Fund, or ING Direct. Make believe this is another expense, and it is — it’s an expense that might save your business some day.

Keep going until you’ve set aside at least six months worth of your gross income. In addition, have a ready source of credit in case a deep recession comes along and you need more cash. Be a miser with your expenses and a hog with your savings. Put it away till it hurts. It’ll pull your bacon out of the fire in a recession.

IT’S COMMON SENSE

This is a basic, common sense guide to recession-proofing your business. In reality, doing this will improve every aspect of the business and boost your bottom line.

It’s just like the guy who banged his head against a wall. When he was asked why he does this, he replied, “Because it feels good when I stop.” It will feel good when you get this done, and you’ll sail through the next recession with a smile.



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