An economic downturn is a phase of the business cycle in which the economy as a whole is in decline.This phase
basically marks the end of the period of growth in the business cycle. Economic downturns are characterized by
decreased levels of consumer purchases (especially of durable goods) and, subsequently, reduced levels of production
by businesses.
While economic downturns are admittedly difficult, and are formidable obstacles to small businesses that are trying
to survive and grow, an economic downturn can open up opportunities. A well-managed company can realize the
opportunity to gain market share by taking customers away from their competitors. Resourceful entrepreneurs capture
the available opportunities, from an economic downturn, by developing alternate methods of doing business that were
never implemented during a prior growth period.
The challenge of successfully navigating your business through an economic downturn lies in the realignment of your
business with current economic realities. Specifically, you, as the business owner, need to renew a focus on your
core clients/customers, reduce your operating expenses, conserve cash, and manage more proactively, rather than
reactively, is paramount.
Here are best practices that will help you to successfully navigate your business through an economic downturn:
Goals:
The primary goal of any business owner is to survive the current economic downturn and to develop a leaner, more
cost-effective and more efficient operation. The secondary goal is to grow the business even during this current
economic downturn.
Objectives:
• Conserve cash.
• Protect assets.
• Reduce costs.
• Improve efficiencies.
• Grow customer base.
Required Action:
• Do not panic… History shows that economic downturns do not last forever. Remain calm and act in a rational manner
as you refocus your attention on resizing your company to the current economic conditions.
• Focus on what YOU can control… Don’t let the media’s rhetoric concerning recessions and economic slowdown deter
you from achieving business success. It´s a trap! Why? Because the condition of the economy is beyond your control.
Surviving economic downturns requires a focus on what you can control, i.e. your relevant business activities.
• Communicate, communicate, and communicate! Beware of the pitfall of trying to do too much on your own. It is a
difficult task indeed to survive and to grow your business solely with your own efforts. Solicit ideas and seek the
help of other people (your employees, suppliers, lenders, customers, and advisors). Communicate honestly and
consistently. Effective two-way communication is the key.
• Negotiate, negotiate, and negotiate! The value of a strong negotiation skill set cannot be overstated. Negotiating
better deals and contracts is an absolute must for realigning and resizing your company to the current economic
conditions. The key to success is not only knowing how to develop a win-win approach in negotiations with all
parties, but also keeping in mind the fact that you want a favorable outcome for yourself too.
Recommended Best Practice Activities:
The Nuts and Bolts… The following list of recommended best practice activities is critical for your business’
survival and for its growth during an economic downturn. The actual financial health of your particular business, at
the outset of the economic downturn, will dictate the priority and urgency of the implementation of the following
best practice activities.
1. Diligently monitor your cash flow: Forecast your cash flow monthly to ensure that expenses and planned
expenditures are in line with accounts receivable. Include cash flow statements into your monthly financial
reporting. Project cash requirements three-to- six months in advance. The key is to know how to monitor, protect,
control, and put cash to work.
2. Carefully convert your inventories: Convert excess, obsolete, and slow-moving inventory items into cash. Consider
returning excess and slow-moving items back to the suppliers. Close-out or inventory reduction sales work well to
resize your inventory. Also, consider narrowing your product offerings. Well-timed order placement helps to reduce
excess inventory levels and occasional material shortages. The key is to reduce the amount of your inventory without
losing sales.
3. Timely collection of your accounts receivable: This asset should be converted to cash as quickly as possible.
Offer prompt payment discounts to encourage timely payments. Make changes in the terms of sale for slow paying
customers (i.e. changing net 30 day terms to COD). Invoicing is an important part of your cash flow management. The
first rule of invoicing is to do it as soon as possible after products are shipped and/or after services are
delivered. Place an emphasis on reducing billing errors. Most customers delay payments because an invoice had
errors, and therefore, will not pay until they receive a corrected copy. Email or fax your invoices to save on
mailing time. Post the payments that you have received and make deposits more frequently. The key is to develop an
efficient collection system that generates timely payments and one that gives you advance warning of problems.
4. Re-focus your attention on your existing clients/customers: Make customer satisfaction your priority. A regular
review of your customers’ buying history and frequency of purchases can reveal some interesting facts about your
customers’ buying habits. Consider signing long-term contracts with your core clients/customers which will add to
your security. Offer a discount for upfront cash payments. The key is to do what it takes to keep your current
customers loyal.
5. Re-negotiate with your suppliers, lenders, and landlord:
i) Suppliers: Always keep your negotiations on the level of need, saying that your company has reviewed its cost
structure and has determined that it needs to lower supplier costs. . Tell the supplier that you value the
relationship you have developed, but that you need to receive a cost reduction immediately. Ask your supplier for a
lower material price, a longer payment cycle, and the elimination of finance charges. Also, see if you can buy
material from them on a consignment basis. In return for their price concessions, be willing to agree to a long-term
contract. Explore the idea of bartering as a form of payment.
ii) Lenders: Everything in business finance is negotiable and your relationship with a bank is no exception. The
first step to successful renegotiations is to convince your lenders that you can ultimately pay off the renegotiated
loan. You must point out to your lenders why it would be in their best interest to agree to a new arrangement.
Showing them your business plan and your action plan that includes your cost-savings initiatives, along with "the
how" and "the when" of the implementation of your plan is the best way to achieve this goal. Explain to them that
you will need their cooperation to insure that you can survive, as well as, grow your business during the economic
downturn. Negotiated items include: the rate of interest, the required security to cover the loan, and the beginning
date for repayment. A beginning date for repayment could be immediate, within several months or as long as a year.
The key is to realize that your lender will work with you, but that frequent and continual communications with them
is critical.
iii) Landlord: Meet with your landlord. Explain your need to have them extend the term of your lease at a reduced
cost. Make sure you have a clause in the lease agreement that entitles you to have the right to sublet any or all of
the leased space.
6. Re-evaluate your staffing requirements: This is a very critical area. Salaries/wages are a major expense of doing
business. Therefore, any reduction in the hours worked through work schedule changes, short-term layoffs or
permanent layoffs has an immediate cost saving benefit. Most companies ramped up hiring new employees in the good
times, only to find that they are currently overstaffed due to slow sales during the economic downturn. In terms of
down-sizing your staff, be very careful not to reduce your staff to a level that forces you to skimp on customer
service and quality. Consider the use of part-timers or the current trend of outsourcing certain functions to
independent contractors.
7. Shop for better insurances rates: Get quotations from other insurance agents for comparable coverage to determine
whether or not your present insurance carrier is competitive. Also, consider revising your coverage to reduce
premium costs. The key is to have the right balance-to be adequately insured, but not under or over insured.
8. Re-evaluate your advertising: Contrary to the other cost-cutting initiatives, evaluate the possibility of
increasing your advertising expenditures. This tactic realizes the advantage of the reduced "noise" and congestion
(fewer advertisers) in the marketplace. The downturn period a great opportunity to increase brand awareness and
create additional demand for your product/service offerings.
9. Seek the help of outside advisors: The use of an advisory board comprised of your CPA, attorney, and business
consultant offers you objectivity and provides you with professional advice and guidance. Their collective
experience in working with similar situations in past economic downturns is invaluable.
10. Review your other expenses: Target an across-the-board cost-cutting initiative of 10-15%. Attempt to eliminate
unnecessary expenses. Tightening your belt in order to weather the downturn makes practical, financial sense.
Proactively managing your business through an economic downturn is an enormous challenge and is critical for your
survival. However, through well-planned initiatives, an economic downturn can create tremendous opportunity for your
company to gain greater market share. In order to take advantage of this growth opportunity, you must act quickly to
implement the above best business practices to continue realigning and resizing your company to the current economic
conditions.