Into every entrepreneur's life the occasional rain must fall. Hence that old chestnut about saving for a rainy day. But when the drizzle turns into a downpour and your financial cushion is deflated, bailing out your budget and keeping your company from sinking means making difficult decisions. Three experienced entrepreneurs who have faced down the challenge and survived agreed to share the choices they made. Their strategies demonstrate that there are more ways to stay afloat in a cash crunch than scrambling for a life-preserving loan.
Slash lease and IT costs
VDL-5 Technologies, Santee, Calif.
Employees: 5
2010 revenues: $500,000+
A small, veteran-owned company that creates electronic equipment manuals for the military, VDL-5 got caught in a squeeze common to government contractors: a delayed contract. Co-founder and CFO Tamara Harpster had to reassess the company's finances again and again as a contract originally expected in late 2009 was delayed three times: first until July 2010, then until September, and again until December.
By the second delay, it was obvious the contract wouldn't arrive before the company's cash reserves ran out. VDL-5 had no choice but to lay off two employees and impose a 20 percent pay cut on the remaining employees, including Harpster and her business partners.
To economize further, the company renegotiated its lease and dropped its IT support vendor in favor of one offering the same services at a lower price. VDL-5 also spent its unexpected downtime aggressively pursuing contacts for future work.
"Since it will be a couple of months before cash starts flowing again, we're going to continue with our current cost-cutting to keep our reserves up for the future," Harpster says, noting that the long-awaited contract came through in the final weeks of 2010. "At this point, it looks like we'll get through this cash crunch without having to borrow money or have the partners invest more into the business."
Rely on Your Employees
Lamar Everyday Spa, Scottsdale, Ariz.
Employees: 45
2010 revenues: $1.3 million
An economy that makes spa days a luxury has taken its toll on the spa industry. Just ask Heidi Lamar, whose Lamar Everyday Spa endured a 50 percent drop in revenues in 2008.
Yet Lamar Everyday Spa remains in business while competitors around it have shut down. Lamar credits that survival entirely to her employees, who agreed to pay cuts of as much as 30 percent to keep their team intact.
"The core value of your business is your team, so you have to look at how you can get their help in solving the problem instead of seeing them as part of the problem," Lamar insists. Though she dropped wages and shifted salaried managers to hourly or commission-based pay, only two Lamar Everyday Spa employees quit, and one soon returned.
Meanwhile, Lamar negotiated discounts with vendors, combining orders and delaying payment from 30 days to 60 days, and encouraged employees to find ways to avoid wasting shampoo, massage oil and other products. And, after learning that many local spas refuse to let people use their health insurance for massages because they don't want to deal with insurance billing issues, Lamar decided to accept insurance—a move that boosted revenues by almost $200,000 in 2010.
"We're a stronger, better, closer company than we were before," she says. "Our customers have stayed loyal because there was so little turnover during the tough times. They're confident we aren't going anywhere."
Rethink Roles
Next Level Seminars, Loves Park, Ill.
Employees: 8
2010 revenues: $790,000
Robert D. Smith, owner of Next Level Seminars, offers programs designed to help small companies grow. In late 2008, Smith realized he was spending more money but attracting smaller audiences. As long as his prospective customers were cutting their spending, he would have to do the same.
Smith cut hours company-wide, but at the same time began training his support staff to close sales. This change gave the admins the opportunity to earn commissions to supplement their suddenly smaller paychecks.
More important, however, it nearly doubled the company's sales staff at minimal expense.
Meanwhile, Smith approached other seminar companies and suggested they work together by endorsing and appearing at each other's non-competing events. As the partnerships expanded Next Level's prospective audience, the support staff was ready to supplement and back up the sales team.
"They aren't spending half their time doing sales, but the day business picked up, I wasn't starting from zero, because they were already familiar with what needed to be done," Smith says. "And if I lost a salesperson, even temporarily, business wouldn't grind to a halt."
The strategy worked: By September 2010, attendance at Next Level seminars was back up, and employees were working full-time again. Smith even hired two new staffers in December.
This story appears in the March 2011 issue of Startups. Subscribe »
