Take Steps to Minimize the Effect of an Economic Downturn

And nearly one in five of these business owners believed that they were at risk of going out of business because of the overall declining economic climate.

And this survey was conducted more than a month before the emotions surrounding the $700 billion "rescue plan" and before the severe Wall Street crash in October.

Professor Ed Hess of the Darden School of Business at the University of Virginia recently said, "Nothing is more stressful for a small business owner than talk of economic catastrophe. You start thinking about everything hanging in the balance, and if you aren't careful you let your worries overwhelm your common sense. Rather than taking steps to safeguard your business, you find yourself paralyzed by anxiety."

It is important for business owners to be very aware of all aspects of their business and the business environment they are operating in not only to survive but to see opportunities to get more out of the inevitable economic recovery going forward.

As a small business owner you are not only in a position to survive tough times, you are in a position to turn them to your advantage.

Small business owners have advantage over larger companies: the ability to quickly respond to changing economic conditions and to quickly change the way they are doing business from aspects such as marketing methods, introducing new products and services, modified pricing offers, team motivation and asking for their input and support and focused customer service of existing customers.

Will this be easy? No. Can the poor economy be used as a scapegoat for poor business performance? No. Will this require a positive attitude, a belief in yourself and the ability to avoid negative people? Yes. Will this be hard work and require extra hours at the office? Yes. Will this require new creativity in how you run your business? Yes. Will you need to turn to others who have different experiences than you have in running businesses? Yes.

During difficult economic conditions, and particularly with tight credit conditions, cash flow becomes even more critical to grow a business or, at a minimum, to maintain a business's performance and be positively positioned when the recovery begins. And cashflow is primarily driven by profitability; however, it is important to understand that profit is not something that you can just get more of.

What you can do is influence what the profit line will be by focusing on and improving the five variables that contribute towards the profitability of the business. And these five variables apply to every business, of every size, and in every category of industry whether it is a manufacturing business, a retail business or a service business.

According to ActionCOACH founder and CEO Brad Sugars, there are five variables that generate profit. This process of increasing profits is called "the five ways."

• Leads generated
• Conversion rate of Leads to Customers
• Number of Transactions per Customer
• Average $ Sale per Transaction
• Expense Margin as a percentage of revenue

As a Profitability Model:

• Leads X Conversion Rate will generate the number of Customers

It is important to understand that Profitability can be impacted by improving the performance of any one or all of the five variables: Leads, Conversion Rate, Number of Transactions, Average $ Sale per transaction, Expense Margin. The Number of Customers, Total Revenue and Profitability are only outcomes of the five variables.

Therefore, it requires focusing on the '5 ways to increase your profitability in tough economic times' as the actionable drivers to change profitability rather than the non-actionable statement, "I want more profits."

As a starting point to improve the performance of the five variables, you must know what your current performance is for each variable. If you don't know your current performance level, you will not know what might lead to improved profitability and where to put continuing operating emphasis as you go forward.

The following are some tactics to improve your five variables immediately. Will all of these examples apply to your business? Not necessarily, but they are common sense ideas and not rocket science. Specifically develop five tactics for each variable that you know will apply to your business and focus on making immediate changes to your business and measure the results versus your current performance.

Leads:

• Ask your current customers for referrals.
• Design your advertising creative around promotional opportunities rather than brand building – good promotions will reinforce your brand.
• Make sure you identify and use your Unique Selling Proposition (USP) that differentiates you from your competition, the reason why potential customers should do business with you and not someone else.

Conversion Rate:

• Get testimonials from your current customers and use them with your Leads.
• Do demonstrations, samplings, free seminars, etc. that will allow leads to have real contact with your products or services.
• Follow up and follow up again (a 'no' now could be a 'yes' next week); find out why they didn't buy and continue the relationship through a newsletter, emails, postcards.
  
  

Number of Transactions per customer:

• Send a 'Thank You' card after each transaction and invite the customer back, perhaps with a coupon enclosed for the next transaction.
• Hold occasional 'Closed Door' sales for your best customers or an Anniversary Sale for all your current customers; use this an opportunity to move excess inventory by special pricing.
• Make sure your customers know your full range of products and services and suggest additional purchases around this checklist. And ASK for the order.

Average $ per Sale:

• Cross-sell or add-on sell; ask for more than what the customer is initially looking for, such as a package deal.
• Offer a value-added gift (not discount) from your existing portfolio of products or services to customers for a minimum size purchase or commitment.
• And ASK, "Is there anything else you need?"

Expense Margin:

Intently examine ALL your current costs including Cost of Goods/Sales and your Fixed Costs and determine what is not absolutely necessarily or can be realistically reduced at this time.

• Develop a detailed annualized Profit & Loss, Balance Sheet and Cashflow budget for your business and update it every month with a reforecast of the annualized period that takes into account all updated anticipated changes. This will allow you to have a "best knowledge" of what you expect your business to look like in the annualized period – this monthly updated review may seem to be difficult to predict but it is necessary to control your business versus just "hoping."
  
  
• Classify or grade your customers into A, B, C or D based on criteria that are important to your business – and then do business only with the A and B customers. C and D customers may add revenue but financial analysis consistently shows that C and D customers don't increase profits and tend to have higher costs of operating and in effect are probably operating at a loss. Service A Grade customers and sack the C & D graders.
  

As an example of how this Profitability Model can impact your business: If you focus on making changes in each of the five variables with a goal of improving the performance by 5 percent in each variable, this would increase your number of Customers by 10.25 percent and your Profit by 27.5 percent!

There are more than 25.5 small businesses in the U.S. employing more than half the American work force. It's imperative in tough economic times that every one of these businesses dedicates their performance to surviving and improving profitability; this Profitability Model will help them down this path.