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Risky Business

With the economy looking up, taking some spending risks now can strengthen your company--just be sure to invest wisely.

If small businesses are any barometer for the rest of the land, then things are looking up for the remainder of 2007. According to a Wells Fargo/Gallup survey of entrepreneurs in the fourth quarter of 2006, entrepreneurial optimism is at its highest since the survey began four years ago.

Sixty-two percent of respondents expect revenues to increase through 2007, and 75 percent expect positive cash flow during that time. "In general, small-business owners are optimistic," says Rebecca Macieira-Kaufmann, executive vice president and head of the small business segment at Wells Fargo in San Francisco.

In good times, business owners are apt to spend more of their surplus cash to open new stores, hire new people, purchase more equipment and generally take the kinds of risks for growth they might not take while in hunker-down mode. Still, with no consensus that 2007 stands to be a bullish year, no entrepreneur wants to get caught too far out on a limb if the economy heads south unexpectedly. "There are two kinds of optimism: reckless optimism and smart optimism," notes Macieira-Kaufmann. Likewise, there are smart ways to spend cash for growth that will put you in good stead regardless of which way the tide turns. Here are a few moves to consider.

Get lean. Rather than taking on numerous fixed costs, consider investments that lead to greater operational efficiency and a leaner company that can compete nationally or even globally, advises Bill Carter, state director of the Oregon Small Business Development Center statewide program in Eugene. "If you have the right systems in place, there are [information systems] available that allow the smallest of businesses to operate as large enterprises do," says Carter, citing just-in-time methods--which allow businesses to keep only the inventory they need on hand--as worthwhile investments that streamline businesses and improve their productivity. "That's one of the key problems small businesses have when the economy tips: clearing their inventory," says Carter. "But the technologies that can put them on the cutting edge are there now."

Invest in HR. Talented employees are the very lifeblood of any business, and smaller companies typically have a harder time offering the perks that attract the best and brightest. Consider ways to improve your recruiting and retention strength by sponsoring a 401(k) plan. New internet-based plans have dramatically lowered the setup and management fees. As a less expensive alternative, set up a profit-sharing program that will allow employees to share in the bounty when times are good, says James I. Herbert, professor of management and entrepreneurship at Kennesaw State University's Michael J. Coles College of Business in Kennesaw, Georgia. "That way, they feel a little added value to their work and participation," he says. And when you hit a more difficult year, the employees will understand why they're not reaping a reward.

Staff up judiciously. Because employees are a fixed cost, you don't want to up and hire 10 people simply because you have more cash in the bank. But if you've been just getting by with the employees you have, and if you expect revenue and cash flow to be up in the coming year, consider increasing staff strategically now to make it easier to handle more business later, suggests Chris Borden, a financial advisor and vice president of Natick, Massachusetts-based Canby Financial Advisors. "The small-business owners I talk to seem to be operating at full capacity, so their employees are working full time and putting in overtime hours," he says, adding that many business owners need to hire more employees if they want their companies to grow.

Any plan for organizational growth should start with a meeting with your CFO and accountant to project how far you can go with the cash you have, decide how much you should be putting away for a rainy day and figure out what kinds of investments you can make in the business today. Exercise caution, but remember: Calculated risks during good times very often insulate a company when the winds change.

C.J. Prince is a writer specializing in business and finance.

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This article was originally published in the May 2007 print edition of Entrepreneur with the headline: Risky Business.

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