Quick Tips: How to Recession-Proof Your Business

From smSmallBiz

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.

>Ratchet down inventory. When a recession hits, the last thing you'll want to do is get stuck with shelves of needless inventory. If spending $30,000 a year on boating gear, for example, isn't necessary, make sure your purchase orders reflect that. For a better idea of what you'll need as the year progresses, keep an eye on leading consumer indicators such as those offered by the National Retail Federation and the Conference Board . Also, establish inventory targets and make sure the sales and purchasing departments are talking.

Maintain prices. You may be tempted to slash prices to free up cash flow. That's a mistake, says Bradley J. Sugars, a business coach in Las Vegas. Sure, you'll sell products but you'll also cut your profit margins and likely dilute your brand in the process. Plus, if customers decide to buy again from you in the future they may expect similar discounts.

Reserve discounts. "Don't go into a discounting war," says Sugars. Since you don't want to dilute your brand's value and you especially don't want to start competing on price with discounters such as Wal-Mart Stores and Target, tread lightly when it comes to offering discounts. Be sure to reserve them only for current, repeat customers. "You're trying to breed loyalty" without diminishing your brand's value, says Sugars.

Focus on service. While expanding your business into markets abroad may be avenues for growth, many small-business owners should focus on their existing customers and clients for a boost in revenue. With this in mind, Sugars suggests focusing on service. "It is one of the best ways to add value without costing money," he says.

Invest in employees. When the going gets tough, the employees you have will be your productivity all-stars, says Lenhart. Make boosting productivity — within reason, of course — a focal point. For those that rise to the top, be sure to reward them accordingly. "You don't want to lose your most productive people at this time," he says. Consider offering vacations or time off, which can be cheap incentives.

Free up cash flow. While you're attempting to cut costs and grow sales, "now is the time to call in favors," says Howard Applebaum, chief lending officer of Sterling National Bank in New York. Be sure to free up your business's cash flow by asking to have payments to suppliers extended. Also, if you have old debts, call them in. Having a good amount of cash on hand, especially in light of the credit crunch, will help you do everything from make payments to employees and vendors to spend on marketing campaigns that may grow future business.

Renegotiate contracts. If a contract, a lease or other obligation will soon be up for renewal, try to negotiate lower prices. At this point, you may be able to also make cuts, says Applebaum. If you don't need 50,000 square feet of office space, consider paring down. "It is really a reality check that requires a tough look at your expenses," he says.

Look to expand your business. If, on the other hand, you're sitting pretty, Carmen Bianchi, director of San Diego State University's Entrepreneurial Management Center, suggests giving the competition a gander. "Look for weaknesses and instability," she says. If they've been having trouble, you may be in a good position to pick up their business at bargain-basement prices. Obviously, make sure you can afford it, says Bianchi, but their loss may be your gain.