Going Down?

The rumors of our economy's impending demise may be greatly exaggerated--but that doesn't mean you shouldn't prepare for the worst.
Magazine Contributor
10 min read

This story appears in the February 1999 issue of Entrepreneur. Subscribe »

While economists quibble about this year's economic outlook, Deborah Noland is preparing her interior design firm for the worst, while hoping for the best. The downturn that began after the stock market plunge last August recalled for Noland her experience a decade earlier: Following the 1987 crash, Noland & Associates barely managed to eke through the ensuing recession by slashing fees and targeting high-end residential clients unaffected by mundane economic disasters.

This time around, Noland's Matthews, North Carolina, firm will be ready if the economy hits the skids. "We've cut overhead, paid company debts, renegotiated long-term financing and initiated aggressive marketing efforts throughout the booming Charlotte market--not to mention launched our Web site," says Noland, 47. "Whether we're heading into a recession or it's just a momentary dip on the economic roller coaster, I'm pulling out all the stops."

Similar views have been voiced by a growing number of diverse business owners who, until now, have known nothing but a vibrant economy, which hasn't helped equip them for the potential economic downturn ahead. So just how might this downturn impact entrepreneurs and what can you do to protect your business?

"[1999] is going to feel particularly bad for businesses because we've experienced such good economic conditions for the past five years," says Mark Zandi, chief economist for Regional Financial Associates (RFA), a research and U.S. economic analysis provider in Philadelphia. "We've had double-digit growth for much of the recent past, and we'll see only marginal profit gains in 1999, so business [owners are] going to feel that the environment has changed dramatically."

Paul DeCeglie, who is personally opposed to recessions, has weathered more than a few economic storms in the quarter century he's been covering business and economic issues for the American Banker, the Journal of Commerce, Entrepreneur, Business Start-Ups and other business publications. You may contact him online at MrWritePDC@aol.com.

High Expectations

Jim McCoy, a partner in PricewaterhouseCoopers LLP, puts it another way: "Most companies have high expectations built on an almost maxed-out economy that has produced increasingly greater sales and revenues." McCoy, a cost-management consultant, notes that "At the same time, fixed costs have climbed; more people are in elevated positions at higher salaries; companies have moved into new buildings; and more expensive benefit programs are in place. Unlike the 1970s, it's not inflation that has escalated the cost of doing business. In fact, we have a deflationary economic environment, which makes it difficult to pass on those costs. So 1999 will be a tough economic year, particularly for companies overburdened with increased fixed costs."

To mitigate some of her expenses, management consultant Nancy Dorrier plans to transform her staff of seven paid consultants into a cadre of commissioned independent contractors. Dorrier, president of 10-year-old Dorrier Underwood in Charlotte, North Carolina, already feels the pinch: "Client dollars are being redirected away from [our] long-range corporate vision because of reduced profits and downsizing," she says.

Dorrier's $1.2 million firm is broadening its revenue sources by offering a new "mastery program," which brings together small groups of executives from various companies for week-long intensive studies in management, says Dorrier, 54. "And we're investigating avenues that might help us economize," she adds.

Dorrier is helping other businesses make the same kinds of preparations she's making at her company. "Ask your customers about their plans," she advises. "Get input from your banker and anyone else who might have a vested interest in your success or who might be at risk in a tough economy."

How tough? Economists aren't in agreement on the severity of any impending downturn in the business climate or when it will be felt. Bank of America senior economist Nancy Woodall predicts a less robust economy this year with the gross domestic product declining to a 2.2 percent growth rate from 3.6 percent in 1998. But she expects inflation (as measured by the U.S. Consumer Price Index) to climb to only 2 percent, compared with 1.6 percent in 1998. Woodall is also forecasting a rise in unemployment to 4.8 percent--from 4.5 percent--and a decline in housing starts to 1.47 million homes this year, down from 1.58 million in 1998.

Similarly, RFA founder Zandi predicts slower growth in 1999 based on his projections of a 1.7 percent increase in the gross domestic product, unemployment of 5.1 percent, a 2.3 percent rise in the Consumer Price Index, and a decline in housing starts to about 1.39 million. "I expect 1999 to be the weakest year for the economy since 1992, but still nonrecessionary," says Zandi. "On the other hand, recession risks are rising quickly. The deepening global financial and economic crisis is clearly the most significant challenge yet faced by the nearly 8-year-old economic expansion."

Get Busy

Whether it's a downturn, a recession or an economic dip, business owners need contingency planning. Zandi urges entrepreneurs to:

  • Be cautious about making expansion and hiring plans.
  • Do what you can to secure financing now.
  • Make sure your credit lines are in place, or expand your credit lines; negotiate the best terms possible in case revenues weaken substantially.
  • Set up a plan to reduce your cost structure. It may become important to reduce overhead and costs as quickly as possible.
  • Diversify your revenue sources--particularly away from industries such as manufacturing, agriculture, financial services, energy and other sectors sensitive to weakening economies.
  • Discuss plans with your employees--let them know if you intend to reduce bonuses or hours.

To gauge whether the U.S. economy is either in or about to slip into a recession, Zandi suggests monitoring several indicators including: consumer confidence, the job market and unemployment claims. So what's the bottom line? Zandi puts the probability of a 1999 downturn at 25 percent.

"Confidence should be supported by the economy's balance sheet: Corporate balance sheets are pristine; financial intermediaries are flush with capital; and household debt burdens are coming down due to dropping interest rates and less aggressive borrowing," Zandi says. "It would be unprecedented for confidence to fall to recession levels with these kinds of conditions."

Plan For The Worst

A recession will rear its ugly head eventually, argues Eric Flamholtz, a management professor at UCLA. Flamholtz, who is also president of Management Systems Consulting Corp. in Los Angeles, emphasizes the need for strategic planning to avoid having to make critical decisions in the midst of a crisis. "No one thinks clearly in a crisis," he says. "Plan ahead. Do more with less. Consider how you might reorganize your company as a result of potential layoffs or attrition. You may have to redefine people's roles--you can't assume that responsibilities will be automatically picked up by remaining employees. Study how you can reorganize so fewer people can still cover everything that must be done."

McCoy of PricewaterhouseCoopers recommends using part-timers and independent contractors to fill in the gaps. He stresses that in an economic downturn, "It's important to consider working capital management [accounts receivable, inventory and cash] and the potential impact on customers and suppliers."

You'll also need to consider your customers. "Ascertain if your credit terms are right, how vulnerable your customers are, and whether you have too many unprofitable [ones]," McCoy says. "Make sure you aren't dependent on too few suppliers, and determine how vulnerable your suppliers are." McCoy suggests making your company important to the success of your customers and suppliers to ensure the type of enduring relationships that are essential during hard economic times. "Enter into supply agreements with vendors," he advises, "and provide value-added services to customers."

John LaRico is doing just that. "[We're] re-emphasizing personalized customer service and re-evaluating our vendors to secure the best value," says the co-owner and vice president of Golden Grocer Natural Foods Inc. in St. Louis. LaRico has repositioned his three health-food stores to appeal to price-conscious shoppers. "We've established everyday low prices. It's been necessary to cut overhead, but it's been effective in generating sales."

Despite the expected economic downturn, LaRico, 50, sees sales increasing in 1999 beyond the $2 million level the company reached last year. "While we're reducing overhead and studying operations to find other revenue streams and budget cuts, we're also augmenting marketing efforts," he says. "We just launched a vigorous new marketing program--including TV and print ads--with financial support from our vendors. The arrangement helps cut costs and boost sales."

Cutting costs is exactly what Joan Chan plans to do--again. The 45-year-old owner of Oriental Lumberland Do it Best Inc. survived the Northeast's severe construction slowdown of the early 1990s by instituting an austerity program. At the same time, she says, "[We] shrank credit terms and restricted credit to select customers. If the economy impacts our sales, we would again control credit rigidly and reduce payroll, overtime, entertainment and promotional expenses such as community newspaper advertising." The Brooklyn, New York, lumberyard and home center, with more than $3 million in sales last year, is "on the front line of the real estate business," says Chan. "We are extremely vulnerable to economic swings." Chan is also looking at debt restructuring to take advantage of low interest rates and provide a cash flow cushion for her 13-year-old company.

Adding Value

In contrast to those business owners who are reducing expenditures or devising tighter budgets, Henry Evans is investing more money than ever to improve services for customers of Albuquerque, New Mexico-based Advantage Printing Specialists Corp. (APS). "The likelihood of an economic downturn is real," contends Evans, 31, "so we're positioning ourselves [appropriately] to meet the current and anticipated needs of our existing and future clients across the country. Advanced technology and value-added services provide the marketing edge we need in an increasingly competitive arena where virtually everyone is offering quality printing at competitive prices."

Because clients, too, will be negatively impacted by economic pressures, Evans is making APS more valuable to them. "Our new technology not only introduces Web site, online and OCR [optical character recognition] ordering capabilities, it presents clients with detailed reports on purchases," he says. "And we provide summary billing for clients with reduced accounting or administrative staffs."

The 7-year-old multimillion-dollar company, which has upgraded to be Y2K-compliant and meet government standards for electronic commerce (ANSI X-12 compliant), produces and distributes printed materials and promotional products as well as detailed accounting reporting. APS has offices in Albuquerque, New Mexico, and Dallas and is scheduled to penetrate the El Paso, Texas, and Boston markets somtime this year. "This technological conversion represents a substantial and expensive investment," Evans admits, "but one that allows us to take advantage of a business downturn for our competitors. We anticipate working harder and capturing greater market share even in a poor economy"--should the economic roller coaster be headed in that direction.

Preparing For A Fall

The following list includes steps to consider before the economy falters:

  • Draft contingency plans.
  • Reduce expenditures.
  • Use consultants, temporary or part-time workers.
  • Renegotiate outstanding debts.
  • Pay down credit lines.
  • Build cash reserves.
  • Revisit expansion plans.
  • Assess impact on profits.
  • Identify discretionary expenses.
  • Evaluate the potential impact on your customers and suppliers.
  • Diversify revenue sources.
  • Review organizational structure.
  • Enhance your value to customers and suppliers.
  • Solicit advice from your banker, accountant, customers and suppliers.
  • Ask customers about their plans.
  • Provide value-added services.

Contact Sources

Advantage Printing Specialists, 2910 Girard Blvd. N.E., Bld B., Albuquerque, NM 87107, (800)461-6012.

Dorrier Underwood, 831 E. Morehead St., #255, Charlotte, NC 28202, (704)343-9092.

Golden Grocer Natural Foods Inc., (314)367-0405, fax:(314)367-7751.

Oriental Lumberland Do It Best Inc.,(718)386-8200, fax:(718)821-1031.

Regional Financial Associates, www.rfa.com.


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