Coming Down

Recession or no recession, business as usual won't do in 2001.
Magazine Contributor
11 min read

This story appears in the April 2001 issue of Entrepreneurs Start-Ups magazine. Subscribe »

As this article goes to press in winter, the talk of the nation for the past two months has been about a U.S. economic slowdown. Journalists are trotting out reams of data to detail plunging corporate profits and a bear stock market. And some indicators, undeniably, look bad:

  • The Commerce Department showed growth slowing to an annual rate of 1.4 percent in the fourth quarter from the third quarter's 2.2 percent and the second quarter's 5.6 percent.
  • The Conference Board saw its widely followed Consumer Confidence Index fall to its lowest point in more than four months: 114.14 in January from 128.6 in December.
  • OPEC seems determined to keep oil at or above $25 per barrel, while natural gas prices have risen astronomically.
  • Such stalwarts of the New Economy as Intel are issuing profit warnings.
  • Fed chairman Alan Greenspan reported to Congress less-than-encouraging news on January 25: "As far as we can judge, we have had a very dramatic slowing down, and indeed we are probably very close to zero [growth] at this particular moment."

Judging by the statistics, it looks like Morgan Stanley Dean Witter chief economist Stephen Roach may have been right when he predicted a recession for 2001 in a January 8 report.

But...maybe not. The majority of economists think we're headed for slower growth-not a recession. The Wall Street Journal's annual forecasting survey asked 54 economists for predictions. Consensus has growth slowing to 2 percent in the first quarter before accelerating to 2.9 percent at year's close. Unemployment should also remain low.

"The economy has too much momentum to be in a recession in 2001," says , chief economist at the National Federation of Independent Business, adding that federal, state and local governments spending their budget surpluses will be an added buffer in the coming year.

Another factor to remember is the breadth of the American economy. "Over the past 20 years, not every sector has gone into recession at the same time," says William B. Gartner, the Henry W. Simonsen Chair in Entrepreneurship at the University of Southern California in Los Angeles. "There's not just one industry cycle."

Still, it's hard not to get skittish-especially if you've never been through this before. At press time, we were closing on the 10th straight year of economic boom-plenty of time for many firms to mature without ever feeling the nasty backside of the economy's hand.

And, for fast-growing companies, 2 to 3 percent growth can feel like a recession, says , principal and founder of capital market advisory service The Econoclast Inc. and participant in the Blue Chip Economic Indicators survey. With lower inflation expected in 2001, pricing pressure will be tight. At the same time, customers will be squeezing you to cut prices further as slow growth limits their expenditures.

"We have a slowdown in expectations but not in spending," says Dunkelberg. "It's a question of how fast or whether these expectations get translated into spending."

Canaries In the Coal Mine

What data gives you the best indication of where the economy is headed? Here's what economists and entrepreneurs say:

"Watch job creation, " says the National Federation of Independent Business' Bill Dunkelberg. "If that turns negative, that's a clue we've got weakness."

David Friend of eYak keeps an eye on the annual rate of IPOs. A slowdown there means VCs are funding fewer startups, which reduces the number of fast-growth firms that fueled development in the '90s.

Economist Michael Cosgrove suggests tracking the value of the U.S. dollar against foreign currency. If the greenback remains strong, he expects more easings by the Federal Reserve-which should prime the economy. "But should the dollar weaken significantly," he says, "the easing may be off, and we could have an extended slowdown into 2002."

Dunkelberg also watches another economic barometer. "We could see a sharp curtailing of capital spending, especially since it's discretionary," he says. If so, that's a vote of no confidence by your fellow business owners-and a good indication to take things slow.

Finally, Houston financial advisor Ronald P. Schutz has a folksier approach. "I use the weight of the paper after I pull the classifieds out," he says. "When the newspaper gets light, retailers aren't spending money on ads."

The purveyors of financial information know that scenario all too well.

Proceed With Caution

If only the paranoid survive, it pays to be cautious. The economy's growth has slowed faster than anyone expected, and a recession may show up as quick as a champagne hangover.

We've talked to academics who study entrepreneurs, business owners who've weathered these storms before and professionals who work with distressed firms. Here's their advice on dealing with rough financial waters:

Set and monitor benchmarks.
First and foremost, you need to establish realistic goals-and monitor them religiously. , who sold his 300-employee landscape company to ServiceMaster Co. in 1998 and is now the director of the James A. Ryffel Center for Entrepreneurial Studies at Texas Christian University in Fort Worth, notes that only 30 percent of the entrepreneurs in his executive education class have budgets. Do you?

Minor suggests working on zero-based-not zero-growth-budgeting. "Start from scratch every year," he says. "Don't assume you're going to [spend] the same just because you did [before]."

In a slow-growth period, Minor says, it's particularly important to get financial statements from the previous month by the 10th of the current one and to revise your budget every three to six months. "If you're not hitting your top-line numbers, you're going to want to evaluate the expense side," he says.

Not all benchmarks should be related to money, though. "Financial monitoring comes at the end," says Earl Eisenberg, a business consultant and workout restructuring specialist in Chagrin Falls, Ohio. "[But] you also need monitoring at the beginning and in the middle." For example, try establishing the time it should take employees to finish tasks and then monitor how long it takes them to do so. If employees meet interim goals, you'll stay on budget.

Focus On: Money & Employees

Line up cash.
Money is always king, but never more so than in a downturn. That's why , founding partner in Newport Beach, California, firm Squar Milner CPAs and Business Consultants, advises businesses to check their lines of credit before things get out of hand.

Or if you're thinking of selling a stake in your firm to venture capitalists, there's still money out there, according to Paul R. Johnson, professor of global entrepreneurship at the American Graduate School of International Management (known as Thunderbird) in Glendale, Arizona. But VCs are much pickier about the firms they invest in.

That makes it a good time to be flexible about giving up more equity than you normally would, says David Friend, founder of software company eYak Inc. in Boston. Says Friend, "I'd rather have a smaller piece of a company that survives than a larger slice of a company that fails."

Manage your staff.
If you live through an economic downturn, you'll thank your employees. And they'll thank you if you've been forthcoming with them.

"If you're anticipating problems, don't bury your head in the sand and try to handle them yourself," Minor says. "Communicate the way it is and the challenges that lie ahead, and work as a team to solve the challenges."

To avoid layoffs, don't staff up. Friend, for example, throttled back for 2001. "We were about 90 employees headed to 140," he says, "and we decided to head to 110." Telling employees the reason for the cutbacks boosted the staff's sense of security.

Also, try filling openings with temps, says Minor. And if cutbacks are required, cut perks (golf-club memberships, free sodas, etc.), overtime and benefits before cutting people. A salary freeze might be in order, too. "Give bonuses in lieu of salary increases," he says.

Of course, that means leading by example, says , managing partner of the Irvine, California, law firm Marshack, Shulman and Hodges LLP, which has worked with many distressed small businesses. Says Shulman, "Executives should only take what they need for reasonable living expenses."

Spend wisely.
Salaries and benefits aren't the only places to cut corners. "Don't overexpand; don't overcommit; don't overleverage," says Dunkelberg.

Just as Minor recommends leasing talent, he also suggests using rentals. "Forgo capital expenditures unless you know you'll be at capacity," says Minor. "You can lease just about anything."

"If it can't generate revenue in the next 12 months, we're putting it off," says Robert L. Wallace, founder and CEO of two computer training companies, LLC and The Bith Group Inc., both in Columbia, Maryland.

But don't expect to find all your savings in big-ticket items or office supplies; dig around to find less obvious budget killers. "In good times, there's a tendency for principals who have credit cards to purchase at higher amounts," says Squar. "A leakage can occur on the managerial level as well."

Focus On: Customers & Suppliers

Eye your clients.
If more than 60 percent of your business comes from one client, you're overexposed-but you're especially exposed during an economic downturn. "You want to have as many different clients as you can," says Johnson.

At the same time, you've got to curry favor with your stronger clients. "How do you make sure you get your share of fewer dollars?" asks Wallace. "Most of that is a result of your relationship with your customers." Now may be the time to get in closer touch with big clients and spend your skinnier entertainment budget on taking those clients to dinner more frequently.

It's also a good time to develop tighter partnerships with larger firms, says Wallace. In a budget-tightening period, you may win outsourced business by delivering a service for less than big firms can do it themselves internally.

Strengthen your supply chain.
Your customers aren't the only ones to watch. Suppliers impact the health of your business, too.

Even if your business is fine, you have to consider the sources of any raw materials. "Think about critical components and resources you need and how strong your suppliers are," says Gartner.

You might even try to barter with your suppliers, especially if you run a service company. For example, Wallace traded the computer skills of some of his underutilized staff for legal services. "It's kind of like fixed cost," he says. "I'm paying their salaries even when they aren't billable."

Shulman notes that if your own finances start to look shaky, you should approach suppliers early. "A company can negotiate forbearance or stand-still agreements to keep out of the bankruptcy-court arena," he says. That assumes, of course, that you've whittled expenses down and you approach suppliers before problems become acute.

Focus On: Advisors and Decision-Making

Seek good advice.
If you've never been through a down-turn, find someone to help you. But be careful, says Eisenberg: "[Bad consultants] may slash enough cost to create a profit short-term but ruin the infrastructure of a company so it can't recover."

Eisenberg also warns against relying too heavily on CPAs, bankers or lawyers-who often analyze your problems from their own professional standpoints rather than a broad perspective.

Other business owners are another source of good advice, says Ronald P. Schutz, founder and chair of The Smart Group Houston, a Houston-based financial consulting firm. Schutz belongs to the Emerging Entrepreneurs division of The Executive Committee, which can be used as a mutual support society when members face down times. Says Schutz, "At least one of us is in a low spot each year, but we support each other so we know we're not alone."

Act quickly.
Regardless of what options you face in the coming year, most experts suggest you don't dawdle. "Make difficult decisions quickly," says Squar.

That may include the toughest decision of all: "The choice is always plateau and be stagnant, or sell the company while it's worth a lot and move on," says Friend. That's not an easy call to make if you've always seen yourself moving on to a new venture. But if you're unwilling to fish for several years to come, it's better to cut bait now. That way you can get your next enterprise ready for the next upswing.

If you decide to stick with it, though, you'll have it easier if you've taken care of all the previous points. With financial information, a solid economic foundation and people to act as your sounding board, you'll be able to make good decisions without much worry-even in a down market.

A former editor of Success magazine, Chris Sandlund writes about business from Cold Spring, New York.

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