How Small Businesses Are Affected By The Economic Downturn

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Econ 101The Wall Street Journal is reporting that small businesses can potentially be hurt more by the Dow plunge than big companies. Why? Essentially, big companies can take more of the hits, there’s more of a cushion and there are more options. 

Read more at The Wall Street Journal.

On a side note, the Small Business Administration has laid out 10 recommendations that small business owners should consider to stay afloat during these tough economic tides:

1. Watch your inventories carefully, but don’t hold them down so tight that you’ll lose 
sales. Typically during a slowdown, there is an imbalance between slumping retail sales and 
bloated inventories — don’t be saddled with leftover merchandise that ties up your cash flow.

2. Monitor your cash flow very diligently, and forecast it
 monthly to ensure that expenses and planned expenditures are in line with accounts 
receivables. Make sure your financial statements provide information that is timely, relevant and
 accurate. Cash flow statements are superior in this regard to income statements and balance 
sheets. Be able to project where you will stand three months in advance.

3. Separate the “nice to do” from the “have to do,” and eliminate nonessential expenses as
 much as possible. Ask yourself, is that activity necessary? If not, don’t do it. Also consider 
cutting personal spending.

4. Reduce or stretch out debt, and build up your capital reserves. Watch the creditworthiness 
of your customers, even bread and butter accounts. Remaining close to existing 
customers, and checking to see how they are getting on during the economic downturn, not only
 helps avoid unpleasant surprises but could also lead to new opportunities.

5. Get aggressive with collections. According to the partner of a consulting firm, “when 
business is good, companies tend to become lazy about collecting on receivables. This can prove
 dangerous in a recession.” Assume that the average collection period for your industry is 45 
days, but your company is at 51 days. After bringing that collection period down to the industry
 average, keep working to get it down to 40 days. Being tough with customers may be 
unpleasant, but it’s an important safeguard against the effects of a prolonged economic 
slow down.

6. Look hard at capital spending. Consider delaying both the purchase of 
high ticket items and expansion plans that take a long time to pay off. At the same time, make 
sure you have enough capacity to start filling orders again when the economy stabilizes.

7. Strengthen your banking relationships, which includes letting lenders know the 
company’s financial position. Banks are looking for business to boost their income, but are
 also trying to minimize risk, so they are careful about what kind of loans they undertake. Most
 experts agree, however, that seeking additional credit during a recession is not advisable.

8. Now is the time to be prudently aggressive in the marketplace. Actively seek out new
 business, and perhaps add a salesperson or two or an extra service to give you an edge over 
competition.

9. Historically, many businesses reduce advertising and promotional expenditures rather
 than slash fixed costs during hard times. However, studies have shown that those maintaining 
or increasing ad outlays during slowdowns wind up outselling rivals who cut back.

10. Another mistake during recessionary times is to reduce training budgets. Training can 
best be conducted during slack periods — especially low-cost, on-the-job instruction and
 broadened skill acquisition. Also, local community colleges offer a number of free classes that 
teach and upgrade trade and office skills and supervision techniques.

Remain resourceful and resilient and you’ll be ready when the market rebounds.