For most of us, the last decade has been one of unprecedented growth in our markets and our businesses. Nationally, the economy and stock market have grown faster and longer than at any time in history.
Recently, however, the outlook has not seemed quite as rosy. One of the real challenges for any business, and particularly for small businesses in the kitchen and bath industry, is how to recognize and adjust to significant changes in the business climate.
This month, I'll take a look at some strategies for preparing for the future. These include getting your house in order, creating a forecasting system for your business and making adjustments to market conditions.
Holding onto cash
When times are good and you're experiencing a profitable period with strong cash flow, you should make sure that you're using that cash flow to strengthen your business base. This can take several forms, but it essentially means retaining much of your cash within the business.
The first step is to create a means of setting aside some liquid assets for that proverbial "rainy day." For example, an investment in bonds, money market funds or even a simple savings account will work well. The key is to put some cash away in a form where the principal amount will not be impacted by downturns in the financial markets.
If your business is like most, the situation probably is not too different than most of us face with respect to our personal finances; in other words, it's hard to save when there are so many pressing needs.
One way to deal with this is similar to what's recommended to individuals, and simply set aside a fixed amount, on a regular basis. A practice we've established in our business is to make a deposit to our investment account each time we pay a payroll. We set an amount equal to about 3% of our payroll for this deposit, and over a period of several years, the amount and accumulated interest has grown nicely.
Another area to look at is your fixed assets. During good times, you should replace and upgrade your displays and equipment. If these capital-intensive elements of your business are in good shape, you won't be faced with having to devote cash flow toward them in a down economy.
Finally, there's a tendency when times are good to allow your business expenses to ratchet upwards. You should regularly look at all of your expenses, especially payroll and staffing. The size and cost of your staff is one of the most difficult to reduce when economic conditions dictate that expenses need to be cut.
What's in store
One of the most important responsibilities we have as business owners is that of looking ahead and attempting to project what our businesses will be faced with in the future. While it's true that no one can accurately predict the future all the time, there are several things that we can do to get a glimpse of what will be coming our way.
The first place to look for clues is the various sources of news. One of the most telling factors for the kitchen and bath new construction and remodeling markets is the Consumer Confidence Index. Since most remodeling and renovation is a discretionary expenditure, it's typical for homeowners to put off such spending during periods when they're not feeling confident about the future of the economy.
Obviously, national economic conditions consist of an averaging of local conditions. Since each of us operates on the local level, it's your local conditions that will ultimately impact your business. Most regions will have one or two primary businesses or employers that tend to dominate their local economies. Look at what's happening with these businesses. If they're entering a boom period, it's likely that they will drag the rest of your local economy along with them; conversely, if they're facing cutbacks and layoffs, this will tend to spread, as well.
It's not unusual for trends in the economy to take a fair amount of time to work their way through to various sectors. Because of this, your own business may seem strong, even when other sectors of your local economy are faltering. The danger here is to incorrectly conclude that you are, somehow, going to be unaffected. Incorrectly gauging changes in business conditions can result in missed opportunities, at best, and disaster in a worst-case scenario.
The key to judging what the future holds for your business is to develop some tracking tools that will serve as barometers of where things are headed.
Probably the best short-term indicator of your future business is the projects that you have "on the boards" that is, the jobs that are in the process of being designed and specified. If your business utilizes design retainers as a means of formalizing the start of the design process, your records will allow you to compare current activity with the seasonal fluctuations experienced in previous years. Along with the impressions of your design staff, all of whom are dealing directly with potential clients, this should provide a good indication of what can be expected in the next several months.
Another important business-tracking tool is traffic on the floor of your showroom. You should make it a point to keep track of daily floor traffic, which can serve as a benchmark against which to compare future activity. If you have not been gathering this information, I suggest you begin immediately.
Once you've developed a projection of the future, you'll need to act on that information.
If your sense of the situation is that demand for your firm's services will outstrip your capacity to meet such demand, you may want to hold firm on your pricing, or even increase it. In contrast, if it appears that demand is slackening, you'll want to try to offset this by pricing more aggressively, increasing your marketing efforts and looking for other things which will drive more traffic into your showroom. At the same time, you'll want to take a look at your production capacity and overhead to bring them into line with the expected diminished level of business.
While you need to give careful thought to what the appropriate actions to take are once you've looked into the future, these simple means of trying to see what the future holds will provide you with a head start on dealing with it.