AFTER A TWO-DAY global stock selloff, Gina Stern is one of many small-business owners concerned about what a seemingly all-too-probable recession could do to her company’s sales.
Stern, founder of an airport-based spa chain with locations in Newark, N.J., and Orlando, Fla., frets that a recession may mean fewer customers will come through the airports and book services at d_Parture Spas. A recession “would affect us negatively because there would be less travel,” she says.
Since business may soon be tougher, it’s critical for entrepreneurs to take steps to up-end any damage that could happen as a result of a recession.
Gus Faucher, director of macroeconomics at Moody’s Economy.com, says in the near term “the probability that the U.S. will go into recession or is already in one is greater than 50%.” To forestall such a rout, the Federal Reserve today slashed its key interest rate by three-quarters of a percentage point to 3.5%. Additionally, President Bush today revealed that he isn’t ruling out increasing the size of his proposed economic stimulus package.
That package — now worth around $150 billion — may include rebates of as much as $800 for individual taxpayers and $1,600 for married couples. Plus, about $50 billion is reportedly earmarked for business spending.
However, says Faucher, if energy prices press upward and the housing market continues to cave, businesses that rely on consumers’ discretionary spending will likely face the greatest risk. For example, “if gasoline goes up to $4 a gallon,” he says, “people will likely cut back on going out to dinner.”
But even as luxury-oriented businesses, such as yachtmakers and jewelers, are expected to feel the squeeze during an economic downturn, there are some bright spots. Robert B. MacIntosh, chief economist for Eaton Vance Management in Boston, says, for example, that the falling U.S. dollar could aid businesses that export products overseas. Also, businesses that cater to foreign tourists traveling in the U.S. will likely also see an uptick because U.S. products are now less expensive, he says.
Faucher adds that businesses that work directly with the government may prosper as the government will typically boost spending in its efforts to stimulate the economy. The health-services industry, as well as consumer-staple providers, will remain highfliers. After all, says Faucher, “consumers may not go out to the restaurant but they still need to go to the grocery store.”
The secret to weathering a particularly nasty economy is to diversify your customer base, free up cash flow and cut costs where you can. Here are some steps for recession-proofing your business:
Cut costs. Have a look at your business and figure out where you could save, suggests Bill Lenhart, the national director of business restructuring at BDO Consulting in New York. If three employees are doing the job of one, you may need to make job cuts. Additionally, if you have two product lines and one is successful while the other one isn’t, consider selling off that division. “When times are tough, it’s best to focus on core markets and spend money in those areas, not in areas that haven’t been more profitable,” says Lenhart.