The US debt ceiling crisis and the European sovereign debt crisis both have ramifications for small businesses globally and we are being warned to brace ourselves for another downturn in the economy. Indeed, on 23 August 2011, Gill Markus, Governor of the South African Reserve Bank, in a speech to the American Chamber of Commerce, said that South Africa’s future growth prospects will be significantly affected by global developments. “The world is not in a normal recession”, she said, “but in a financial crisis that typically takes a long time to work through.”
Small wonder that small business owners have been besieged by the travails of the global economy for the past four years – how are we to survive these difficult times?
The first principle of business survival
My field is entrepreneurship and enterprise development – helping entrepreneurs grow profitable small businesses. I am neither an economist nor a recessionista, but I do know that the first principle of business survival is to ensure that you apply sound business practices.
As such, I have always asserted that when it comes to how you run your business, there should be no difference between the good and the bad times. However, it is human nature to become less disciplined during the fat years, so we usually need to reinstate certain disciplines when there are lean times ahead. For me, survival requires a focus on growth. Here are my recommendations for dealing with the recessionary weather:
How to lose weight
When you have to lose the excess weight of the fat years, will you go on a diet or cut off your arm? Entrepreneurs need to clearly distinguish between productive and unproductive expenses and choose the solution that will deliver the right result. Beware of reactionary tactics that cut back on the means of production. When the recession turns, you will find yourself in a vulnerable position without the resources in place to take advantage of the upswing.
Do not cut back on productive expenses. This is when you need to be more aggressive in your sales and marketing and drive to acquire new profitable business.
Do not retrench staff who are important for production. Hire more sales people and, as tempting as it is, do not cut your marketing budget. This is probably rule # 1 in entrepreneurship for dummies: in a recession, increase your marketing.
However, do cut back on unproductive expenses. This means keeping your overheads to a minimum. Trim whatever you can off your fixed costs like insurance or rental and reduce these to the bare bones. That could also unfortunately mean laying off non-essential staff.
Invest in your productive costs
This is critical. Invest the savings that you make on your unproductive costs into your productive costs. The net effect of the cost savings should be zero – but change the balance of your spending in your business. Do not use the cost savings to pay off debt! Rather invest in making more sales, and then the income you need to keep your staff and repay the bank will be generated.
Renew your vows
Renew and consolidate your commitment to growing the business. Spend at least 25% of your time on prospecting for business, selling, driving your sales team and building your resources. Focus on growth. It may feel that you are running on the spot and not moving ahead, but when the alternative is to be moving backwards, on the spot is a good place to be. You will also then have a head start when the economy picks up.
Avoid ego-based decisions
This is not the time to spend on stuff that will make you feel good about yourself. Yes, luxuries do make us feel better when times are tough, but spending on frills is never a sound business decision. If it is not going to boost sales, don’t spend the money. That goes for everything from signage or the gloss on your business cards to the car you drive and the entertainment of clients. Nobody cares what kind of car you drive and clients don’t expect to be wined and dined. They just want you to do the job well and give them value for their money. Apply basic common sense when making budget decisions. Establish a lean and efficient operation and build on that.
Focus on your differentiators
Re-look at what makes your business special and then spend a disproportionate amount of time on building up your unique value proposition. Leverage the distinctive value that you have to offer and invest in it, market it, sell it, grow it… and do it all the time!