This chart shows the price history for a barrel of light, sweet crude oil for future delivery, as traded on the New York Mercantile Exchange (NYMEX), for the last five years (click for larger version). Notice that it was only the crushing recession that hit when credit markets dried up in mid to late 2008 that caused the slide in oil prices. This is because the supply of oil is drying up, and when world economic activity is in full swing, that necessitates pulling expensive oil from the less accessible sources such as the tar sands in Alberta and Saskatchewan. As we have been pulling out of the recession, activity in the oil patch has been increasing, along with world oil prices. As this trend continues we can expect inflation to start to creep up. How can it NOT, when oil prices drive the cost of so much economic activity???? When that happens, you can expect the Fed, Bank of Canada, and others around the world to raise interest rates in order to choke off the dreaded inflation. That will have the “desired” effect, as oil prices will indeed drop as our governments once again put the brakes on what has been a very fragile recovery. The second reason I think we are heading for a recession is that interest rates are surely headed higher over the next few years, in response to the failures that are most likely to come on bonds issued by Greece, and possibly Spain and others in the next few years. Not to mention that if the rating agencies were not controlled by the same crooks that print money at their whim, and yours and my expense, then the true state of the US government sovereign and other US debt would be better understood, with very dire results in the bond market. Either way we get higher interest rates, inflation and recession. So…
What can you, the entrepreneur do to get ready?
There are lot’s of things that have helped me and my business partners during the tough times of 1991, 2001 (in the tech world), and 2008. Here are ten tips to help you weather the storm.
1. Clean up your balance sheet now
This can mean so many things… For starters, this is the time to take a good hard look at where you have your cash invested in working capital. Are inventory levels too high? Do you let your customers take too long to pay and use you like a bank? If so, stop now. Start collecting on time. Start ordering less and more often. That will pull cash out of your Balance Sheet and the best part is that this is your money! You’ve just moved it from a less liquid asset to CASH!
2. Do a pulse check on customer relationships
The tough times of a recession can put a strain on even the longest and most loyal of customer relationships. So now is the time to make sure that your best customer is not feeling taken for granted. Especially in growing entrepreneurial firms, there is a danger that the owner/principal will at some point become more removed from customer facing activity. Maks sure you don’t fall prey to this potential trap by having a disciplined approach to regular customer contact by everyone from the sales rep to the CEO. As one of my mentors once said, “We’re all in Sales”.
3. Oh Banker, Banker, Wherefore Art Thou Banker?
One of the most difficult lessons for me was learning that banks run from the hills when things go bad, and that they are so averse to risk that they only lend you money you could easily get elsewhere. The only advantage is the relative ease of dealing with them, ONCE YOUR LENDING FACILITY IS SET UP. If your business falters during a recession, the bank will not be as patient as you might believe, especially if they are well covered by assets of yours or the company. That said, the difference between your loan being called and not, could be the relationship between you and the account manager. There is no better time than now, when things are good, to spend some time updating your bank about your business, and its nuances. It might not help but it won’t hurt, and if your account manager has some clout, it could make the difference between getting on with business or being distracted with finding a new lender, in less than ideal circumstances.
4. Does anyone need to be voted off the island?
Most people think Jack Welch was a total prick because of his “Vitality Curve” and the affiliated practice of firing the “bottom 10”. I believe this is an inaccurate portrayal of how this works. The practice, when well executed is more of a nudging out than a full out firing. Every organization has a few individuals that do not show the motivation, nor achieve the results, that your company deserves. Weed them out now… before they start really costing you. And don’t ever forget to make that top 20 and middle 70 percent of achievers feel heard, welcome, appreciated, needed and well compensated! You will really need them when things are tough.
5. Who Let the Dogs Out? You!!!
Just as with employees, every company has it’s stars and its dogs when it comes to the products and services they offer. You should know which ones are which, and now’s the time to clean house, and discontinue your current dogs, to make room for new and more profitable offerings. If you don’t have a clue which products make you money, start with a contribution margin analysis, then look at which customers buy which products, and decide if you can let a few dogs out…
6. Examine Facility/Occupancy Costs
So many small businesses have saddled themselves with expensive monthly office or other facility rents, when they could have taken a more flexible approach. That more flexible arrangement could be very valuable if you need to make major adjustments to your business during a prolonged downturn. This means trying to get the most flexible/favourable terms on your premises lease, consolidating locations, and examining if your current premises are in line with corporate values.
7. If you think you will need to invest, do it now
Financing all but dries up for small business during a recession, so if you think you will need additional machinery or equipment, vehicles or any fixed asset, then now is the time to take the plunge, while term interest rates are low, and lenders are lending. Obviously try to use your fixed assets as efficiently as possible but if you’re at a logical expansion point do it before the recession. This is especially true for investments that will lead to increased productivity.
8. Position your company to capitalize on others’ weakness
Slower times can mean opportunities to expand your business by acquiring or merging with other, less stable firms. You have to avoid acquiring problems, of course, however a well-researched acquisition of a competitor might never be cheaper than during recessionary times. Know who the potential targets are before the timing is right, and you can pounce faster than others when the timing is right.
9. Lock in Revenues Now
Many businesses have the ability to lock in revenue by signing contracts with customers in return for either better pricing, better service or a combination of both. With the uncertainty of the next few years looming over my head, I’m locking up as many customers as I can to long term contracts. This provides an extra measure of comfort during any times but it’s especially soothing to know that fixed costs are covered each and every month by contracted revenues when sales are more difficult to come by.
Yes, much easier to say than to do, but a few of the things you might try are to have employees brainstorm with you on new product ideas, ways to increase share of wallet with current customers, cost saving ideas, and ways to do more with less. They are always the best source of ideas in any organization and it’s the talented leader that can elicit not just the creativity but the energy necessary to do well in times when most are not faring so well.