IT’S BEEN ONE YEAR since century-old Lehman Brothers lapsed into bankruptcy and sent the U.S. economy into a tailspin that’s left few businesses unscathed. From the beginning of last September through the end of August, 83,885 businesses filed for bankruptcy protection, according to Automated Access to Court Electronic Records, an Oklahoma City-based bankruptcy data and management company. As for the companies that survived, many have gleaned lessons that are changing the way they do business.
The changes vary in size and scope. Al Subbloie, the founder and chief executive of Tangoe, a telecom expense management software and services firm in Orange, Conn., has tweaked the terms of his customer agreements. Although, this year has been a relative boon for his company, which helps firms control telecom costs, Tangoe is putting a greater emphasis on locking down his customer base.
“Some clients have gone bankrupt,” says Subbloie. “You don’t think companies like Lehman and Circuit City are going to go bankrupt when you sign them,” he says. “We’ve needed to be more careful about how we write our contracts.”
Survival strategies like this may be inspired by downturns, but they can often aid businesses during upswings, as well, says David S. Waddell, the CEO of investment strategy firm Waddell & Associates in Memphis, Tenn. Consider a company that maintains lean practices even in good economic times. By controlling expenses, sales can boost profits higher, he says. Moreover, “business owners need to have [protection] strategies in place, should events like this recur,” he says. “The [companies] that have been successful [through this period] have built their businesses to be resilient when contingencies occur.”
Here are five lessons that business owners can take away from the downturn:
As scores of business owners saw their credit lines slashed or their loans called during this downturn, securing alternate funding and credit relationships became their top priority, Waddell says. “Having multiple sources of credit would have insulated them when banks stopped lending,” he says. (For our story on alternative sources of funding, click here.)
Tightening credit and dwindling funds don’t always reflect the borrower. “It could be the supplier’s fault,” Waddell says. To reduce your risk, understand who your suppliers are and how they operate. For instance, if your supplier relies heavily on other, less financially secure suppliers, that could be a red flag. At that point, figure out how dependent you are on them, Waddell says. If a single vendor supports a vital piece of your operation, align a backup, he says.
Extend credit carefully
And although a lack of diversity among customers may entice owners to extend credit to boost sales, be leery about doing so too freely, says Donald F. Kuratko, the executive director of the Johnson Center for Entrepreneurship and Innovation at Indiana University’s Kelley School of Business. “Be more conservative about who you extend credit to,” he says. Then, when you hit a downturn, you’ll have a cash reserve, and you won’t have to spend your time chasing after customers who aren’t able to pay, Kuratko says.