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Gonna Be A Tough Year

Survive '09 by reducing expenses and watching cash flow.
December 18, 2008
URL: http://www.entrepreneur.com/article/198958

The last year of this decade is shaping up to be the most challenging in a long time for entrepreneurs. A range of statistics, from credit availability to consumer spending, appear to point toward a 2009 that will be, if not a train wreck, at least a time for caution. Economists tracking the indicators say that entrepreneurs have plenty of cause for concern, although not all the indices are negative.

Perhaps the most telling statistic is the sharp increase in the number of business owners planning to reduce business and capital expenses. In August 2008, 49 percent said they intended to cut back, and by October, that figure had risen to 69 percent. "That's huge," says Alice Bredin, a small-business market researcher and advisor to OPEN from American Express Small Business Monitor. "That's a lot of businesses not spending."

Entrepreneurs' lurch toward conservatism appears well-founded, according to many economists who see 2009 shaping up as a year of recession. Official definitions of recessions vary, of course. And recessions often aren't declared until the crisis has passed and growth has resumed. But that's no reason to be sanguine about the likelihood of a full-fledged downturn this year. "I think it'll be deep and serious," says Bud Conrad, chief economist at investment research firm Casey Research.

A continuing credit crisis may have the strongest negative impact on 2009. Data collected by the Federal Reserve Board indicate that bank loan officers are tightening credit standards for small-business lenders at a rate not seen since before the recession of the early 1990s. For small businesses counting on loans and lines of credit, that's very serious news, indeed. "I don't want to tell these guys how bad it's going to be," Conrad says. "Some will go out of business."

65%

of senior bank loan officers reported that they recently tightened standards for small businesses seeking loans during the second quarter of 2008. That's an all-time high since record keeping began in 1990.

(Source: "The July 2008 Senior Loan Officer Opinion Survey on Bank Lending Practices")

When credit is hard to come by, strong sales and profits can fill the gap and allow businesses to continue operating and even expand. But sales growth has slowed across the board. Sales in all sectors increased by 6 percent for the 12 months before October 2008, down from an 8 percent average increase over the past five years, says Adam Filipponi, an analyst with Sageworks Inc.

Not all the news is bad, though. It appears that many businesses have cut costs fast enough to overcome the slump. Filipponi's figures show that those businesses' operating margins have increased over the same 12 months. "My guess is that they're finding ways to cut back," he says. "That's important, because it's going to be harder for them to borrow. So it's important to have strong cash flow from operations to fund growth or even to stay in business."

And not every sector will be equally affected. The hard-hit finance, insurance, real estate, residential construction and entertainment industries have all seen sales decline, according to Sageworks. But sales for utilities and educational, health-care, professional and technical services are all on the upswing. "That makes sense," Filipponi says, "because those are industries where there's a need."

While recent bad news rivals any seen since the 1930s, it's unlikely that this contraction will be quite that bad. "This is very different from the Great Depression," says Conrad, "because the government bailout is much bigger." Along with the government's willingness to act, deposit insurance and lower trade barriers represent major economic distinctions between today and the Depression era.

The massive government intervention could spell a return to inflation. Conrad expects just that as the economy begins to improve late this year. That should help revive the housing and residential sectors and give entrepreneurs a chance to raise prices. But getting there may not be easy. "To survive in this environment requires extreme caution," Conrad says. "Batten down the hatches."