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Thriving in a Downturn

The long period of economic growth that has characterised recent years means that many business people have never experienced an economic slowdown, let alone a recession as deep as the one we currently find ourselves in. Without this experience the skills and techniques needed to succeed in these severe conditions are not always available. This article may help focus you on to the critical areas where action must be taken if you want your business to come out of a slump in good shape.

The Classic Pricing Mistake

Recession will mean falling sales, higher levels of competitor activity, slower payments from customers, reduced access to lines of credit, often higher interest charged and increased pressure from suppliers for quicker payment. During such times, for the inexperienced and experienced alike, it can be tempting to reduce prices to maintain sales levels. This can have a disastrous effect on profits and can weaken the business. For example if you are making a 30% gross margin and you cut your prices by 10% you will have to boost your sales by 50% to be better off. The chances of increasing sales by 50% during a recession are slim.

Minimise Your Costs

Practical things that can be done immediately include taking action to reduce debtor days and to resist the temptation to manufacture for stock in the belief that the cost per item is more important than total cost. Keep inventory levels as low as possible without impacting on your ability to service your customers. Manage your cash flow tightly and minimise your working capital requirements. During this time many organisations will be seeking your business and you need to negotiate hard for the products and services they offer. Reducing your fixed costs or converting them to variable costs is also important and anything that can turn you in to the lowest cost producer should be considered. Note that I said lowest cost producer and not the lowest price seller.

Companies that grow quickly during good economic times often over employ staff and use them inefficiently. Consider redrawing production or manning schedules to minimise overtime working and if necessary reduce the numbers of non productive staff. Do this with care as the people who tend to go first are often the ones with the highest capabilities or have the deepest experience and when the upturn comes can be expensive to replace. Think also about the impact on the morale of those that remain.

Finally if you are sitting on none productive assets then see if they can be disposed of. These can take the form of plant, equipment, obsolete or slow moving stock items, surplus buildings or land. Remember profits are not made from owning assets but from using them. Any surplus income should be used to reduce high interest debt.

Review Your Sales and Marketing

Sales that were easy to get in the past become harder and harder and the importance of being different from your competitors gains in importance. Companies that pay attention to developing a clear marketing and business strategy, who make their operational processes both efficient and effective and manage their cash flow properly can continue to prosper and grow. Sales activity should be concentrated on the most profitable lines and not the easy to sell, low-margin items.

Some businesses are closely tied to particular sectors and when these sectors decline they inevitably go with them. This is particularly apparent in firms serving the house building sector like electricians; joiners etc. but it can also impact firms like carpet manufacturers and distributors, bed manufacturers and even retailers of electrical goods. If your organisation is heavily dependent on one area for much of its business then thought should be given to developing other counter cyclical sectors. Look for those that become more active as others go quiet. Over dependence on one large customer can be a problem if they are adversely hit by the recession so broadening your customer base should be a priority.

If you are already blessed with a broad customer base then customer retention is the most important thing to focus on. Competitors will probably be working harder to capture your share of the market and making sure that you maintain your marketing investment will make it harder for your rivals to succeed. If you closely monitor and manage your marketing spend you will improve your return on investment. Rivals that reduce their sales and marketing efforts will be weakened in the marketplace and their brands devalued.

Be Ready for the Upturn

Companies that follow these guidelines will be better placed to emerge from the present business climate in a more healthy state then they started and better positioned than their competitors to prosper from that situation. The average duration of slowdowns since the 1930’s has been eight months and this time should be used to prepare for the time when the economy begins to improve again.

Quick Guide

  • Rule 1 Don’t panic
  • Rule 2 Control debtors
  • Rule 3 Convert fixed costs to variable costs
  • Rule 4 Be the low cost producer
  • Rule 5 Minimise inventory
  • Rule 6 Negotiate for services
  • Rule 7 Pay off high interest debt
  • Rule 8 Reduce none productive staff
  • Rule 9 Sell off non contributing assets
  • Rule 10 Manage your cash flow and reduce your operating capital requirements
  • Rule 11 Concentrate on the most profitable lines
  • Rule 12 Reduce your dependency on one customer
  • Rule 13 If you have a good spread of customers focus on retention
  • Rule 14 Don’t reduce your advertising or marketing spend, use it more effectively
  • Rule 15 Get a USP (Unique Selling Proposition). What makes you different from your competitors?
  • Rule 16 Recessions don’t last forever; consider how you will be placed to exploit the upturn when it arrives


Gordon Stewart MBA MIC is an experienced business consultant working for CEOSTRA Ltd. helping businesses grow and prosper. August 2008