Expect the Best and Prepare for the Worst

The weather reports were ominous. A hurricane was heading toward the Hawaiian Islands and the projected path could devastate my home and business. We responded by determining time frames for making decisions should things get worse. As the storm moved closer, I re-established the next point in the decision-making process to avoid both over and under reacting.

Fortunately, the storm passed without incident, but I realized that the lessons learned from preparing for a natural disaster are applicable to enduring changes in the economic climate, as well. Survival and recovery require intelligent preparation and decisive action.

Coming off several of the best years in our business careers, many of us are unsettled by the economic changes around us. Everyone responsible for running a business, organization, showroom, rep agency or manufacturing/importing company must consider how, when or even if the changing economic environment will affect their operations.

At the moment, my business is doing well. Products are selling at a comparable pace to last year. And yet we know that we’re not immune to the economic downturn that has already begun in other parts of the country. So what do we do?

Planning for Change

The first step is to really understand what is taking place in your market. I watch the credit markets daily to understand the impact they will have on the economy. I check the 10-year Treasury bond yields because they determine mortgage interest rates. More than anything else, mortgage rates dictate how the decorative plumbing and hardware industry
will perform.

The availability and cost of mortgage money are the most important factors in residential real estate. They affect new construction, new sales, renovation and remodeling.

The recent move by the Federal Reserve to lower interest rates provided an immediate boon to the stock market. The downside to this move is that the dollar became weaker. For the first time in 30 years, one U.S. dollar is the equivalent of one Canadian dollar. The Euro gained more ground. As a result, products imported from North of the border and Europe just became a lot more expensive.

It’s also a good idea to follow employment trends in your area. Follow the number of building permits issued, and watch your own traffic carefully.

Adopt an operating philosophy where you expect the best but prepare for the worst. The sales you do make must be profitable enough to cover all your expenses, so focus on selling at good margins and keeping expenses manageable.
As entrepreneurial business owners, we can be too fixed on gross sales. But sales alone don’t drive our business. Gross profit is what’s important.

The knee-jerk response to a slowing economic climate is to sell product at little profit in order to generate cash flow. Rather, you should keep your margins high enough to cover ongoing fixed expenses and provide profit. In a down economy, it’s essential to control expenses and avoid the temptation of compromising profitability for cash flow.

During the last downturn, I reviewed our chart of accounts to identify areas where expenses could be cut without compromising staff or our ability to service our customers. I focused on recurring expenses and identified a short list of items that I could affect immediately. They ranged from re-negotiating my lease rents to aggressively bidding better rates for insurance coverage, credit card processing, business and health insurance and phone service. As a result, our expenses dropped by $50,000. If you operate on a 5% to 10% profit margin, you need to generate $1 million in sales to generate $50,000 in profit.

But cutting expenses is only one possible solution. You can also gain ground by leveraging the things that make your products
and firm unique.

The role of your company’s leaders is critical. Management must be seen as competent, confident and in control. They need to provide honest evaluations of what staff can expect, reinforcing the firm’s commitment to performing every job more effectively, both in making profitable sales and in controlling expenses.