[Business Primer] Recession Survival Guide

One would think there wouldn’t be a need for recession planning; we should see them coming. The constant “sine wave” of business cycles makes recessions as inevitable as surging booms. Of course, if you put 10 economists in one room, you’ll get 11 opinions, so the exact timing of recessions is darn near impossible to predict. Still, like hurricanes, recessions come along once in a while, and occasionally one will wreak havoc on the shoreline.

One of the great business models that can teach how to weather recessions is seasonal retailers. For instance, there’s a small business around the corner that sells swimming pools and backyard leisure items in the summer. Yet, when seasons change their business needs, you can bet the farm that their display changes to snow blowers, wood stoves and chain saws in September, and Christmas trees in December. Recessions come as regularly as seasons, just not as often. Businesses and consumers alike should be prepared for them just as they prepare for winter. So here’s a guide for businesses to handle recessions and the inevitable boom that follows.

THE BASICS. When you get right down to it, handling recessions, or any kind of business slowdown, consists of three things:

• Cutting expenses as much as possible without affecting sales and income
• Maintaining sales and income as much as possible in the current environment
• Having and properly using an emergency fund to help weather the storm
  Recognizing the basics and actually implementing a plan can be two different things. Here’s how to start:

1. Understand the financial ebb and flow of your business
You should be using a computerized accounting system. QuickBooks is the most common system right now for many small businesses. If you have an accountant, he or she is probably using it. (If you’re using an old paper system and doing your own bookkeeping, your first task is to change immediately.) (Editor’s note: There are many pest control industry-specific software packages available to PCOs today. See www.pctonline.com/software for a list.)

Your primary tools are found in the company financials, sales and customers sections of QuickBooks. But regardless of which accounting software you use, it is important to analyze the following data:

Profit and Loss Statements (P&L). The program will allow you to see all your expenses and income — categorized — and tell you if you’ve made a profit or suffered a loss during that time period. Run the P&L as far back as you can, five or 10 years if possible. Do it for each quarter and annually. You will be able to tell what period of time is most profitable, when expenses rise, what the expenses are, when income increases and in what categories.

Sales and Representatives. If you have a sales force, the sales section of QuickBooks shows sales details by individual salespeople. This will tell you who’s doing the best job and who needs improvement.

Customers and Invoices. The Customers & Receivables section of QuickBooks will show you open invoices and accounts receivables aging details. Again, regardless of the software you’re using, it’s important to know how long it takes you to get paid and how many outstanding invoices there are for each period. This is crucial since the amount of time it takes you to collect has a direct impact on your cash flow.

Once you have this information at your fingertips, you’re ready to begin recession-proofing your business.

2. Cut expenses
Actually, a wise businessperson should be doing this all the time. The trick is not to be like the butcher who backed into his meat grinder and got a little behind in his work. Trim only the fat, and beware of cutting things that bring in revenue. The first step is to scrutinize the expenses part of your P&L statement. Take steps to reduce obvious expenses that can be lowered: energy costs (by installing efficient windows or insulation), superfluous purchases, eliminating inventory or services that aren’t profitable, that’s the obvious. The rest is more difficult, especially in these areas:

Advertising. Be very careful to differentiate between crucial advertising that brings in business and that which doesn’t. Ask customers how they heard of you. Offer coupons that must be brought in so you know the source of the customer. Record the answers and use the information to better manage your advertising budget.

Sales representatives. Use your sales records to rank your representatives and assign territories. Know ahead of time who needs to improve their performance. Help them increase their achievements if you can; cut them if you must. In a recession, the survival of your business may be at stake.

Employees. This is another tough row to hoe. Laying off people is the kind of thing that makes you wish you hadn’t gone into business. Examine closely the functions of each employee. In a recession you may be forced to retain only key employees. Be ready, have the decisions made ahead of time and hope the day never happens. Prepare yourself to carry it out if the time comes.

3. Watch your cash flow in good times
Business is good, money pours in, why get crazy, right? So collections are behind and expenses are too high, profits are still good, so why bother? The preceding words are the main reasons why businesses fail during recessions. There are many dangers of financial complacency, and when economic slowdowns occur, the business is blindsided. Collections are abominably slow, expenses are high, and it’s a scramble to get rid of bad habits developed during economic booms. Pretty soon the “Going Out of Business” sign appears on the door. Straighten it all out during the good times, just when you think you don’t need to — because you really, really do need to.

4. Set up an emergency fund
This is crucial. If you do nothing else, at least do this. Start putting 10 percent of gross in a ready, liquid fund tied to your business. Use a good steady bond fund like Vanguard Intermediate-Term Tax Free Municipal Fund, or ING Direct. Make believe this is another expense, and it is — it’s an expense that might save your business some day. Keep going until you have at least six months worth of your business’ gross income. In addition, have a ready source of credit in case a deep recession comes along and you need more cash. Be a miser with your expenses and a hog with your savings. Put it away till it hurts.

FINAL THOUGHTS. There you have it, folks — a basic, common sense guide to recession-proofing your business. In reality, doing this will improve every aspect of the business and boost your bottom line. It’s just like the guy who painfully banged his head against a wall. When he was asked why he does this, he replied, “Because it feels good when I stop.”

It will feel good when you get this done, and you’ll sail through the next recession with a smile.

The author is a certified financial planner, enrolled agent, a registered financial consultant and founder of Astre Planning. Contact him at www.ProsperousBoomer.com.