Smart moves as the storm subsides

By J. Tol Broome Jr.

If you’ve been reading the business headlines, then you know that the Great Recession is officially over. In the United States, gross domestic product has grown by more than 3% for a couple of quarters. Other factors, including consumer sentiment, manufacturing capacity utilization and business inventories, have been trending in a positive direction.

In the bedding business, the numbers also have been encouraging. In the first quarter of 2010, mattress unit sales were up 11.2% compared to the same period in 2009. The dollar value of those units increased 10.3%, according to the International Sleep Products Association.

So why doesn’t it feel like the downturn is over? For one thing, even if your sales are up, your profits may remain below pre–recession levels.

And the headlines contain troubling negative economic news—unemployment rates around 10%, a continued slide in housing prices and record government deficits, among other things.

Ranking the recession

Recessions are a lot like hurricanes and vary widely in severity. With a Category 1 hurricane, there’s a lot of wind and rain, but the storm comes and goes and is soon forgotten after a week or two of cleanup.

As a hurricane moves up the Saffir–Simpson severity scale, the challenges become more daunting. The worst storms are rated Category 5 and carry winds in excess of 155 mph.

The best–known, modern–day Category 5 storm was Hurricane Katrina, which hit the U.S. Gulf Coast in August 2005 as a Category 3 storm, after weakening from Category 5 in just a matter of hours. Category 5 hurricanes have life–threatening winds and flooding rains. Property destruction is usually widespread and the overwhelming amount of debris can take months or even years to clean up. Such storms have a life–changing impact on those caught in their path.

The 2001–02 recession was a Category 1 storm. During the few months of the mild economic downturn, companies felt the pinch. But after it came and went, most businesses moved on to even better results.
In contrast, the Great Recession of 2007–09 was a Category 5 hurricane—severe and lengthy. Many companies didn’t survive. Those still standing are left with a daunting debris field.

What should you do to clean up the mess and take part in the recovery? First, take a minute to celebrate the fact that you’re still in business. Congratulations!

What should you do next? Look for the rainbow. It may seem elusive right now, but by taking several steps, you’ll greatly improve your chance of thriving during the period of revitalization that is emerging on the horizon.

1. Focus on quality customer service This is a great place to start because it’s something over which you have direct control. It might be difficult to bring in new customers but you can ensure that your current customers have a great experience. Maintain a positive attitude with your employees so they will want to come to work. And insist that they take the same approach with customers. If employees lack sufficient product knowledge, make sure they get up to speed. An added benefit of good customer service is the word–of–mouth advertising that will result, helping you draw in those new customers.
2. Replace employees If you have employees who aren’t getting the job done, now is the time to make a change. The job market is flooded with able, eager people looking for steady employment. Many have extensive experience in manufacturing and retail and will need minimal training. You might not feel comfortable firing workers during a period of such high unemployment, but you won’t succeed without the right people in place.
3. Assess your business model It’s likely that during the past few years you’ve been focused on survival. You need to resist the temptation to remain in that mode as the economic recovery (hopefully) continues.
   Review your business model. Are you still meeting the needs of your customers? Do you have the right product mix and price points? Should you consider other revenue sources, such as online sales? What should you be doing that you aren’t doing? What are you doing that you should stop doing? If you need to make some changes, map out a plan and a timeline for implementation and then follow it.
4. Take advantage of your competitors’ challenges You’ve been dealing with a Category 5 economic storm in recent years, but so have your competitors. This is an excellent time to assess the competitive landscape and grab market share. Focus on two or three things you can do to improve your competitive position. They might include new product lines, special services or a new advertising campaign. If you have access to capital, it could be the ideal time to buy out a competitor.
5. Manage expenses closely You’ve likely been in hunker–down mode, keeping a tight hold on expenses during the recessionary period. This is no less important during a recovery. If there are areas that could generate additional savings, make changes now. One area you may have overlooked: supply management—not the vital components used in mattress construction but basic office supplies and other items. Some companies allow anyone to place orders, resulting in wasteful spending. If you haven’t already put in place strong controls, this can be a great way to reduce expenses.
6. Preserve working capital Working capital is the investment you have in accounts receivable and inventory, less accounts payable to creditors. You can generate significant cash by improving your working capital position. You can generate cash by collecting receivables faster or paying creditors slower. If you have customers who routinely pay you in 45 days when your terms are 30, ask them to start paying on time. Call late accounts when they become five days late and continue calling every few days until you’re paid. On the other end, pay your creditors when the bill is due, not early. Early payments tie up working capital, leaving you less cash to run your business.

The Great Recession has left a lot of damage and debris in its wake, but the economic cleanup has begun. Follow these tips and you’ll increase the likelihood of finding the rainbow during the recovery. BT

Debt obligations remain—in good times & bad

Recessions can be brutal when it comes to meeting debt obligations. Revenue and cash levels fall, but debt payments don’t.

If it’s difficult for you to cover all your debt obligations, don’t panic. Instead, be proactive. If you communicate honestly and frequently with creditors, you’ll have a much better chance of keeping them off your back, allowing you to focus more on running your business.

Here are some pointers to help you in dealing with creditors during the economic recovery:

• Keep your promises Try to under–promise and over–deliver. If you know you’ll be late, contact your creditor and let him know that you might be 10 days late. Then try to pay in five days.
• Ask for longer terms A supplier might be willing to give you 45–day terms instead of 30. And your bank might be willing to extend your three–year loan to five years.
• Rotate late payments If you have 20 creditors and you can’t pay everybody on time right now, pay 10 of them on time this month and the other 10 on time next month.
• Keep essential creditors current Every company has a few creditors that are essential to keeping the doors open. If you can’t keep those debts current, be sure to keep them well informed. I can tell you from my nearly three decades in banking that the thing bankers hate most is a surprise. We can deal with bad news as long as we have forewarning.
• Consider cash management services Cash management services such as lockbox, computer–based balance reporting and funds transfer, automated clearing house services and controlled disbursement can significantly improve your cash flow. Your creditors will like that!
• Keep your personal credit clean This is critical if you have a small business. Most creditors view the small business and the owner as essentially the same entity. It’s imperative to keep your personal credit clean, particularly if you think you’ll need to borrow money when a sustained expansion sets in. There are five key components of a personal credit rating: timeliness of bill payments (includes tax liens, bankruptcies and judgments), level of outstanding credit relative to lines available, length of time your credit has been active, types of credit and acquisition of new credit. There are three major credit–score sources: Equifax, Experian and Trans–Union. If you aren’t sure what your credit score is, go to the Web site of one of the bureaus and find out.

J. Tol Broome Jr. has spent nearly 30 years working in commercial lending at various financial institutions and currently is an executive vice president and manager of the Specialized