Turn It Up a Notch When more money starts pouring into the economy, is it time to pour more money into your business?
By Dale Buss
Opinions expressed by Entrepreneur contributors are their own.
Andy Cohen and Thomas Dickey see the same reports about theeconomic recovery, and both share an owner's perspective. Butthey have reached radically different conclusions about what itmeans for their businesses.
Cohen's company, Ticketcity.com, is spending $1 million todevelop and deploy new software that will "defragment"the secondary market for sports and entertainment tickets online,where he competes furiously with three other companies."I'm an eternal optimist," says the 37-year-oldpresident and CEO of the Austin, Texas-based company, which rakedin $11 million in sales in 2001. "But I believe if you give100 percent, work hard and give good service, good things are goingto happen."
For entrepreneurs,economic recovery can be as daunting as a recession. |
Dickey acted more conservatively. Although he foresees arecovery for his Canton, Ohio-based company, Heinemann Saw Co.,which reconditions saw blades for steel companies, Dickey, 65, justcan't bring himself to make a purchase of $250,000 forcomputer-controlled, productivity-boosting grinding equipment."I don't think any small-business owner would be inclinedto do so, given the conditions," he says. Though his companyprojects sales of over $3 million for 2002, "We'llcontinue to have a cautious outlook for some time," Dickeysays.
It's not exactly A Tale of Two Cities, but Cohen andDickey's contrasting approaches underscore the fact that, forentrepreneurs, economic recovery can be as daunting as a recession.Torn between optimism about improving conditions and painfulmemories of the downturn that now appears to have ended,independent business owners are at a point of reckoning. Do you goon with making significant investments in your company? Or do youcontinue to hold back with uncertainty about the strength of therecovery and, perhaps, by other factors specific to yourmarkets?
"I'm reading in the papers that the recession is over,the sun is coming out, music is playing in the background andeveryone's happy again," says J.P. Frenza, asmall-business specialist for IBM Corp. "But most owners sayit's still very tight, whether they serve business-to-businesscustomers or consumers. They're conservative with theirspending, and everyone is in a hold-the-line mode."
Analyzing the Recovery
Though the circumstances of every business differ during thisiffy time, there are plenty of common dynamics you can take intoaccount as you make decisions about whether, where and to whatextent to invest in your company during the coming months. Considerthese factors:
* The small-business cycle:Everyone is eager to say the economy has turned the corner. Yet,even if recovery seems to have taken hold, it still may not bereflected in your company's numbers. That may be because thesmall-business arena is one of the last sectors to participate inan economic uptick, trailing large and middle market companies bysix to eight months, says Mike Price, senior vice president ofsmall-business banking for National City Corp. in Cleveland. Hesees a small-business recovery in the second half of 2002.
Michael Butler, vice chairman of Key Corp., anotherCleveland-based bank, adds "Small business might be in for alonger downturn and a slower recovery, or an even longer [periodof] flattening out."
* Wisdom in numbers: Themore sober outlook, bankers say, is reflected in the persistentcaution exhibited by many entrepreneurs well into 2002. Themajority of business owners continued to hold back from major newoutlays in the second quarter. They're heeding the advice ofpeople like Butler. "The last thing we want owners to do isgear up their business too far ahead before orders start to flowin, especially with capital expenditures," says Butler.
Of USBX Advisory Services LLC's three dozen entrepreneurialclients, "only three or four are making investments in theirbusinesses," says Brooks Dexter, senior managing director ofthe Santa Monica, California-based investment bank. "The[others] are taking a cautious approach."
That's why Janet Dagle, owner of Basket Gourmet, which sellsspecialty foods, gourmet coffee and gift baskets, isn'tspending the thousands she would like to invest in new displays andfixtures for her store in Selinsgrove, Pennsylvania."There's nothing wrong with what I have, so why should Ispend money now?" says the 45-year-old entrepreneur, whosecompany boasted 2001 sales of more than $100,000.
Similarly, David Gonzalez would like to buy some laser-equippedmarking tools for his Toledo, Ohio-based company, but hedoesn't trust his order flow enough yet to do so."Customers are still only buying what they need, andthey're buying in very small quantities," says the43-year-old president and owner of Tooling & Components Corp.,whose sales are about $1 million a year.
To Spend or Not to Spend? |
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Rewards of the Recovery
* The rewards of confidence:If you have the confidence to back your ambitions up with actionand financial exposure, the early stages of recovery can be anexcellent time to be proactive. "Good ideas are impervious tothe business cycle," says David Horn, a partner with Tatum CFOPartners LLP, a national group of interim CFOs. "In a periodlike this, people look at their business models to figure out howto make money. It can be a fertile period."
But before you place your company on the bleeding edge, hesuggests you be fairly sure your investments in your business willeventually pay off. To make that determination, ask yourself thefollowing, says Dexter: "What indicators can tell you how yourbusiness is doing? Do you have benchmarks that have been testedduring past economic cycles? What drives your business? Are youable to move fast? There's always an opportunity to be cautiousin the near term and aggressive in the intermediate term if youfeel comfortable around your indicators. There's an inflectionpoint."
Some owners have overcome a lot to get past such points. GerryElwood's company, The Maids Home Services in Red Bank, NewJersey, had sales of $635,000 in 2001. But when Elwood lostcustomers in the September 11 attack, business slowed substantiallylast fall amid the marketplace shock. Since then, however, she hasbought two more franchise territories and has invested incarpet-cleaning equipment so she could diversify her company'sservice offerings. "A bad economy can be a greatopportunity," says Elwood, 49. "When a lot of people hidand tried to wait it out, I went the opposite way."
* The appeal of cheapacquisitions: Consolidation is a popular activity atthis point in the economic cycle because the differences betweenthe haves and have-nots in many marketplaces are exacerbated, andpickups can be inexpensive. "You can do a lot of goodbargain-hunting now," says Don Williams, a San Diego expert onemerging growth markets for Ernst & Young.
PUT YOUR MONEY ON(THE)LINE |
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Good People, Hard Assets and Avoiding Debt
Triangle Printers Inc. is in such an opportunistic mode. Whilesmall printers in metro Chicago got in trouble during the recentrecession after investing wildly in expensive digital equipmentwithout being able to pay up, Skokie, Illinois-based Triangle wasmore conservative. "Every week, another printer is going outof business," says Harvey Saltzman, president and owner."So we've acquired three companies in the last few yearsand are looking for more."
* The availability of goodpeople: Gone is the legendary labor market tightness ofthe late '90s, replaced by a traditional balance between supplyand demand. That means people with the experience, skills andtalents you're looking for may finally be available. Butupgrading doesn't necessarily mean expanding staff. "Mostentrepreneurs would rather see the business first and worry aboutadding staff once they see more orders," says Dexter ofUSBX.
"You don'twant to over-leverage your company if the economy doesn'trecover at the pace you expected." |
As a surviving Internet company, YellowPages.com has its pick ofmany experienced but unemployed dotcommers floating around the jobmarket. "We've found high-quality people at prices thatare shareholder-friendly," notes Dane Madsen, 44, presidentand CEO of the Las Vegas-based online phone directory."We're not bringing in new people indiscriminately, butfilling slots."
* The quandary of hardassets: With interest rates at a an all-time low,construction capital is cheap. But owners aren't eager toexpand their factories or offices just yet. Similarly, prices ofcapital goods and other business properties are soft in the earlystages of recovery. "Everything is favorably priced rightnow," notes Horn of Tatum CFO.
But for many entrepreneurs, that isn't enough to justifymaking big purchases. Dickey at Heinemann Saw says the attractivepricing of the equipment he'd like to buy is enhanced by hisintention to purchase from a European manufacturer. That way, thedollar would work to Heinemann's advantage. "Butthat's still not enough to adjust the decision at thispoint," he says.
* The burden of adding debt:The last thing you want is more long-term debt. Solicit short-termfinancial help from friends and family or other sources, but avoidmore bank debt even if you can obtain it. "You don't wantto over-leverage your company if the economy doesn't recover atthe pace you expected," says Key's Butler.
* The art of the possible:You can advance your company by focusing on what you can accomplishagainst today's economic backdrop rather than on the majoroutlays you're not ready to make. A good place to start ismaking sure your customers remain happy.
Entology Inc. grew robustly even through the recession, butLawrence Prager isn't taking anything for granted."You've got to lock down your customers so they don'thave an excuse to go somewhere else," says the 38-year-oldfounder and CEO of the Bedminster, New Jersey-based IT consultingfirm, whose projected sales for 2002 are about $19 million.That's why Entology added electronic invoicing as an addedconvenience for its customers. "If we can keep costs low andoperate more efficiently than other people," says Prager,"we're going to invest there, because if the economycontinues to be uncertain, we'll take advantage of ourstrength."
NOFEAR |
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Dale Buss is a journalist and editorial consultant inRochester Hills, Michigan.
Contact Sources
- Basket Gourmet
BasketGourmet@juno.com - Entology Inc.
(908) 333-2300, www.entology.com - Ernst & Young
(213) 977-3348 - IBM
www.ibm.com/smallbusiness - The Maids Home Services
(732) 224-1105 - National City Corp.
(216) 222-3640, thomasmichael.price@nationalcity.com - Smith Welding Supply
644 Selden, Detroit, MI 48201, swsweld@aol.com - Tatum CFO Partners LLP
(888) 858-2418, www.tatumcfo.com - Tooling & Components Corp.
www.toolcomp.com - Triangle Printers
(847) 675-3700, hsaltzman@triangleprinters.com