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My Plans for Growth in a Down Economy

I recommend a systematic, incremental approach to growth during hard times.  First, I set very small measurable goals, such as to sell a specific number of additional units of product in a set time frame.  I go out of my way to collect data on not just if this goal is met, but also why my attempts to meet the goal have succeeded or failed.

Honesty Matters More Now

In some instances, selling product may be impossible due to a customer base that is temporarily unable to make new purchases.  In these cases, I recommend strengthening customer service and brand recognition against competition through inexpensive and honest advertisement.  Lying to one's customers when they can't even buy the product is going to crush any business through attrition once the economy turns around.

Do Not Compromise Value for Thrift's Sake

Under no circumstances would I condone sacrificing value to sell products at a lower price.  If I can do nothing else for my business, I would focus on improving my business credit lines and weathering the economic storm at the lowest possible overhead while maintaining my core product values.  The one customer who can come in and buy from me in bad times will be 10 when times are good, but if I have to turn that one customer away, I may not be around to get the others in the future.

Get Your Neighbor's and Big Brother's Help

I recommend using a combination of the government SBA program and local business networking groups for the following reasons:

1.  the government has no conflict of interest (consipracy theories aside) in helping to grow small businesses.  Their advice is as likely to be unbiased as anyone else's advice, and their programs are largely free or extremely competitive with any private business assistance.

2.  Local business groups generally have a mix of different industry professionals, and so they provide a great chance to gain new relationships.  Just like the legend of the ice cream cone being created by neighboring waffle and ice cream vendors, a business synergy in hard times can be mutually beneficial.

Invest Smart

 In order to expand in this environment, I would look to the expansions that are the cheapest because of the recession.  For example, land or building purchases/leases should be about as cheap as they're ever going to get.  I would also buy down debt in order to create a stronger balance sheet for easier access to loans and other growth tools.  I would NOT be investing heavily in big advertising or marketing campaigns -- instead, I would spend extra money on analysis of all current ad/marketing efforts to make sure that they are as targeted as possible.

Maximizing Outcomes of the Worst-Case Options

The business value of each dollar spent in this economy must be maximized through careful planning and analysis of each expenditure.  With wasteful spending at a minimum, any business can easily weather all but the very worst of economic storms.  In the worst case scenario, if you have strengthened your balance sheet and accumulated high-value assets with the last of your available cash, the final option is to hibernate the business or sell it for as much as you can get.  I personally think selling a business for a profit is always a wise move, but I have hibernated my core business from time to time when things were particularly rough.

A crisis is a great time for investments. But while some may consider buying companies on the cheap, they are cheap because their business was not good enough. So that is not a smart way to expand. Better wait until they go broke and buy their customer relations and equipment.

Instead, a recession is a great way to grow organically. If they have a hard time, companies and customers will consider a bit extra how they invest their money. That means making sure you as a company add value to customers, so they come back and eventually bring more customers, growing the business. It means making sure that the existing stores, restaurants, or wherever your business is can handle some extra business. It means encouraging customers to be flexible, for instance by creating special offers for families in the early afternoon, and after-work on Friday evenings, if you run a restaurant.

A recession also means nobody is surprised if you do not make a profit. In healthier times, you would; now, you may be down by half. Use that as a resource, and invest until you break even (if you are running at a loss, you need to rethink your financials anyway, so take it as a lesson). Give back to customers, especially repeat customers. If you can give them something which they feel means you care - a small gift when they buy something extra, a cup of coffee if they have to wait - that means they will care for you. Of course, this means knowing them beforehand, and if you did not try to remember and get to know them, it may not be too late now, even if it is late.

Also take the chance to rethink your marketing. Buying ads just because you always did is not a good reason; put it in the perspective of how it communicates with your customers. Does it bring it new customers? How oes it reach your potential customers? Does your marketing make your existing customers come back? Try different ways - and use it as a reason to communicate with your customers. If they come into your store, ask them if they saw your ads (or website, or podcast). Ask them what would add value to them - for most businesses, there are some crisis-related tips that enhances your business. It can be tips on how to use the office paper more efficiently, or how to cook the doggie bag at home. Whatever it is, as long as it has to do with the crisis, it will probably be apprieciated.

So caring for your customers means investing in them; and like all investments, that means you should expect a return. The return, of course, is more business. You may think about changing your business accordingly, as well, if unexpected activities brings new business (like organizing a family event might increase your sales in categories like coloured paper and marker pens, if you are in the office material business).

And, if you can not make your business come together, maybe you should rethink it. Perhaps the back street behind the warehouse on the other side of the tracks from the station was not the greatest location for a coffeehouse? Perhaps by offering something different (like ethnic coffee) you can make customers discover you. Or you may have to bite the bullet and close the shop. Do not wait too long; a recession is not the time to run at a loss, and even though the interbank rate may be zero, borrowing in a crises becomes only more expensive if you continue to run at a loss. 

Is it possible to grow your business without increasing your risk?  All businesses must anticipate the needs of customers, and customer needs will change from time to time.  This makes forecasting an art, not a science, no matter how scientific you make it.  What today seems like a sensible route to growth, may prove tomorrow to be a dead end.  With your existing business, you want to nurture and preserve what you already have, explore ways to make it bigger and better, but without taking unnecessary or disproportionate chances.  During an economic downturn, every business faces greater risks.  Your small business may be healthy, but the insolvency of one customer may put a fatal hole into your cashflows.  You may win a great new contract, but the failure of a supplier makes it impossible to deliver.  How can you be positive about growth, without endangering what you have already?  Here are a few ideas I have seen small businesses use in practice.

Sell a Little to a Lot

No business needs to be profitable to survive.  It just needs to break even in the long run.  Increasing the number of customers reduces how much the business depends on any existing customer.  That way, if one customer has problems paying or cancels their long-standing order, the cash will still be flowing in from other customers, keeping your business solvent.  If you know a rival business has a particularly good customer, try to turn that customer into your customer, even if it is just on a small scale.  Aggressively target new customers by offering them introductory offers that are close to the lowest price you can afford: the marginal cost.  Calculate the marginal cost by determining how much it costs your business to produce or supply one extra unit, assuming that everything else is unchanged.  Add a percentage to reflect the risk that the new customer may not pay, depending on whether you give credit, ask for a deposit, and what you know about how financially solid they are.  Then offer that price to selected new customers, either for a limited time or for a limited volume of sales.  Be discrete and personal in making the offer; you want the new customer to feel special and you do not want to upset existing customers who are happy to pay the going rate.  The new customers may not be the best customers, but they will diversify the customer base and keep cash flowing through the business.  Some of them may take the offer and nothing else, but others will make follow-on sales, driving growth and profits.  The most important thing is to give prospective customers a good reason to try your business, at a time when most of them will be especially price-sensitive.  However, keep the offer within strict limits, as you want to give them an incentive to try your business, but not to undermine your profit margin in the long run.

Fingers in Many Pies

Diversifying your product range may seem like a risky thing to do, especially if the existing range is relatively successful.  However, nobody knows for sure which products will be most popular with customers in future.  Experiment by trying to add new products that sit outside of your normal core offering, and see if they are popular.  Plan to offer them for only a fixed period and budget accordingly.  This ensures you do not waste money on a long-term commitment to a failure that will sap your business, and gives a defined period for reviewing the returns you generated from your experiment.  Taking a provisional approach will reduce profits, but reduces the downside risks too.  If the new products are successful, you can always revise your approach and make them a permanent addition to your range.

To broaden your range with the least outlay, be open to becoming a reseller of somebody else’s products.  Look for suppliers of products related to your own, that would also be of interest to your customers.  Add them to your portfolio of offerings if you can find marketing or sales synergies, but be careful to avoid picking a supplier that is also a competitor with other products you make.

Avoid becoming over-dependent on a single supplier by sourcing from its closest rivals as well.  Sourcing from several suppliers may reduce margins, but it reduces risks too.  If a supplier lets you down, you have a better chance of keeping your business running smoothly if you can turn to alternate suppliers you already have a relationship with.  In addition, using several suppliers ensures you can immediately take advantage when a supplier gets a lead on its competitors with an imaginative new product or an aggressive cut in prices.

Commitment is a Two-Way Street

Despite the advantages of diversifying your customer base or your suppliers, sometimes business relationships need to be exclusive to be profitable.  Exclusive deals, whether with a customer or a supplier, effectively makes your business a vital component of their business, so you need to bargain for a fair return that reflects the commitment you have made.  Ways to do that include: guaranteed minimum orders or expenditure; clear financial penalties for failing to satisfy contract obligations; advances and payment in instalments to help you manage cashflows for long-term deals; and break clauses at pre-defined dates or if other commitments are not satisfied.  Many businesses will reduce their risk by trying to push risk on to their suppliers or customers; make sure your business is not taking on that risk without putting safeguards in place.  Just as importantly, ensure the rewards for exclusivity are shared with your business, and that your business partners want to succeed through a mutually beneficial relationship.  The best way to do that is to get to know them and their plans.  If they really want both businesses to prosper, they will have nothing to hide.

Separate the New and the Old

Any new venture can fail.  Insulate an existing and successful business by keeping it separate from any new enterprise you undertake.  Although it will increase the running costs and overheads, setting up your new enterprise as a legally distinct corporate entity will mean your old business will not be dragged under if your new business fails to survive.  The new business can still be based on the same acumen and market awareness you obtained from running your old business, and they can buy and sell to each other.  It is also possible for the old business to provide guarantees that will encourage prospective customers to have confidence and sign contracts with your new venture.

The Forgotten Asset?

In a small business, the brain behind the business will often be its biggest asset.  Your knowledge, experience and wisdom are invaluable.  Can you find ways to sell them and create an additional revenue stream?  Many small businessmen also find it lucrative to sell their knowledge as a consultant or business advisor, especially if they work in a sector that is very specialized.  You may not want to sell your knowledge to rivals, but offering to run a workshop for a customer may a natural follow-on to supplying your products or training them on how to use them.  Because there is little or no outlay, there may be a lot of competition for this kind of work, and it tends to be irregular, but the advantage for you is that it can be very profitable when the opportunity does arise.  Finding such opportunities may just involve keeping an open-mind as you network with prospective business partners and customers.  Do not be shy about saying how successful your business is, and be enthusiastic when listening to others talk about their business, and you may be surprised at what additional revenue you can generate.  Try to generate a sixth sense about where to draw the line between giving somebody some friendly informal tips and where you can start charging for high-quality advice or market intelligence.  Any time spent consulting is also likely to enhance the mainstream sales of your company, even if you avoid the understandable temptation to promote those sales directly.  In fact, the more relaxed you are about sales, and the better you are at sharing useful knowledge, the more sales you are likely to make.

Always Some Risk

You can never eliminate risk entirely, so any plans for growth will involve some potential downsides if they fail.  The trick for you, as a businessman, is to identify those growth options that involve long-term risk to the business.  Manage growth of your business like you would manage an investment portfolio: spread the risk and invest most in the areas you understand best.  Do not try to eliminate risk completely, but understand what is a fair return and ask for it.  In the final reckoning, no matter how much you would like to grow, be prepared to sometimes say “no” to deals or ventures where the risk is too high given the current market conditions.  If nothing is ventured, nothing is gained, but always keep enough in reserve that even if you lose today, you can keep coming back tomorrow.

Tough Times

Harsh times provide opportunities.  Our current economic distress has dislodged entire industries.  The legal profession in is the midst of a soul-search that will end up with a lot fewer partners and associates to support them.  Investment banking is a shell of its former self.  My field, financial advisory, is seeing a sea-change in both how the industry is structured and how services are delivered.  New firms are being built on the ashes of former historically relevant businesses.

In any period like this, many people will find themselves pushed out the door or sitting on their hands waiting for things to recover.  Other businesses will realize that opportunities are to be had while everyone is scrambling for cover.

Taking Risks are Risky, Right?

Those more aggressive businesses must be able to quanitify the risk inherent in pushing ahead in treacherous times.  Those investing in their businesses must content with the following hampering -- nagging -- questions:

• What if the markets don't bounce back?
• What happens if I go after growth only to realize there isn't any?
• What if my business has evolved away from those spots I'm investing in?
• What if more economic shoes drop and things grind to a near-standstill?
• What is my backstop?

I'd like to provide a framework for quantifying the risk in expanding during times of crisis and apply some homespun rules to help guide small businesses through these times.

Fidelity Investment's Peter Lynch: GARP Guru

Peter Lynch was a men amongst boys in his career as a mutual fund manager.  Handily beating most benchmarks for years, Lynch devised a strategy of investing in GARP, or Growth At a Reasonable Price.

Lynch attributed his success to being able to invest in winning, growing businesses at fair prices.  He didn't mind paying up for a winning business, but he did mind overpaying for a winning business.

What was Lynch's success?

GARP, or Growth At a Reasonable Price, allowed Lynch to swing for the fences but made sure to cast a skeptical eye on outlandish growth.  Lynch would pass on potential investments if growth prospects were too high.  For Lynch, taking on risk was OK but companies growing by leaps and bounds were just too risky for his portfolio.

How to Lower Risk When Shooting for the Stars

For Lynch, much of his analysis boiled down to using a metric called the PEG ratio.  This metric throws past earnings, current prices, and expectations for future growth into a blender and spits out a number that shows whether or not a company is currently undervalued or overvalued.  Most insightfully, it compares how a company's current valuation stacks up against the market's expectations for its growth. According to Lynch's methodology, the lower the PEG ratio, the more cheaply investors can invest in future growth.

So What Does GARP Have to Do with Small Business?

Lynch believed the major step to achievement is investing in growth.  In taking chances.  In swinging for fences.  But he also believed that investors needed to hedge their bets.  Go for middle of the pack growth.  In Lynch's terms, invest in those projects that offer pretty sure return on investment and don't carry the risk of firehose growth. 

In other words, incrementalize your growth by launching smaller projects requiring minimal investments.

8 Examples of How Small Businesses Can Find GARP

1. Hire or tap a team member to start a blog. Blogging is not about merely having a foothold in the blogosphere.  It's about carving out a space for you to show the world that you and your team/business are experts in whatever you do.
2. Create a low budget, high impact social media strategy.  It costs nothing and both surgically targets your market participants and along with your blog, can further brand you an expert in your vertical.  Twitter and Facebook are like a powerful marketing drug.
3. Explore anciallary revenue sources: Ghostwriting, keynote speaking, outsourced projects.  Vertical integration, consulting, advisory work.  Your position in the industry opens you up to many different potential, revenue-producing activities.  Getting involved with new revenue-producing projects may enable you to stumble on the future growth vehicle for your business.
4. Focus on referrals: Financial advisory work thrives on the word-of-mouth, old-school referral.  "You should meet with X; he's a really sharp guy..."  Think of referrals as a marketing channel within your business and get serious about strategizing how to get more.  Target happy customers and overlapping business partners.
5. Write a book: It just takes time and you probably have an entire tome of material floating around in your head.  The content of the book should represent that you're an expert and focus on a theme that you think target clients/customers would like to read about.  Find a publisher or just self-publish on Lulu.com.
6. Start a radio program: Little cost, high impact.  Find new prospects and let existing customers know about your content.  Use BlogTalkRadio to broadcast and promote yourself and your program.
7. Partner for profits: Reach out to a valued partner and develop a new product or service lacking in your industry.  You'll find new revenue opportunities, create a new source of sales prospects, and grease the referral channel.
8. Educate others and yourself along the way: Education sells.  Bad job markets provide an opportunity for adults to retrain and invest in themselves and get new skills.  Can you expand your business by teaching others?  Chinese medicine practitioners who teach Chinese medicine in local schools will find that students are also potential clients.

Upheaval is unsettling.  Many of us will fret ourselves into lethargy.  Others will take the opportunities given by the market to invest in growth.  Some will whiff big while the smart, well-thought-out business leaders of today and the future will make hedged bets during this period of uncertainty to grow their way to future profits.

Planning for growth in the post meltdown economic climate:

Growth should generally be a key focus for business but the current strained economic conditions mean that for many businesses simply keeping above water is a major challenge. Also, some recent examples of irresponsible behavior by corporate leaders have led to great concern among customers and a desire for signs that businesses are practicing *responsible growth* and long term, *sustainable* corporate architectures.

Responsible practices and long term growth have been great basic business principles for some time, but have become especially valued by your clients, customers, or prospective business associates given the current economic climate. Luckily for the small and medium sized business, responsible rather than reckless spending and adopting a long term rather than short term focus are likely to prove even more valuable now than before.

What kinds of expansion are justifable?

Flexibility is extremely important when times are tough. It is justifiable to expand your business to be more flexible as you face uncertain challenges. Also, expanding for flexibility may allow you to capture or create new markets for your goods or services, or even develop new goods and services. Even as business in general has stopped the dramatic expansion of the last 10 years, the pace of technological innovations remains very fast. This creates both challenge and opportunity for you and your business.

Generally expenses related to significant quality enhancements and product improvements should prove justifiable even during challenging revenue times because they help protect both short and long term business prospects and help to build the long term reputation that is important to your success.

Another expansion focus can be real estate. In many areas of the USA as well as cities around the world real estate values for some types of properties have fallen dramatically and there may be opportunities to reduce lease costs or buy properties to enhance your businesses viability. A caveat here is that prices of commercial real estate in many areas have not fallen nearly as dramatically as home values, so all other factors equal this is probably not a great time to be buying commercial real estate unless the price is very right for you. It is a great time to renegotiate your leases and other real estate service arrangements. Rent costs in many cases do not reflect current reduced values and you should be asking your landlord to price according to those reduced values and the fact that vacancy rates are higher and rising, making you and other reliable renters even more important to your landlord.

Recalculate Risk and Reward:

In my view the best course of action has changed with respect to taking on risks. During the early 1990s many companies took on high levels of risk with large expenditures in an effort to maintain and increase market share - effectively to avoid being "left in the dust" by competitors who were also expanding business rapidly. Our own travel publishing business took this approach as we increased our staff many fold, from about 10 full time writers to nearly 100 at two additional office locations. Although this expansion followed a year of huge revenue growth, we also felt the pain of many when falling revenues could no longer support our large staff and infrastructure.   Despite the current negative economic climate we are expanding again, but this time much more conservatively and with an eye to optimizing our time and resources rather than just using them.

Many new resources are already available or will become available to small businesses during thesae challenging economic times. As during the best of times using your resources wisely and with an eye to optimizing your return on investment are always important guidelines.

First, have hope. Over 93 percent of economists now believe the recession will be over by Christmas. But second, start to position yourself. Now is the time to buy materials at bargain prices and, if possible, lock in long-term financing at "distressed" rates. (Even Microsoft issued new bonds in early May to take advantage of unusually low interest rates.) 2009 is the classic example of a crisis that's also an opportunity - but to expand wisely, understand that the world has changed.

Watch the government. Starting on June 15th, there's new financing available under the 2009 Recovery Act. It offers up to $35,000 in short-term relief for businesses "facing immediate financial hardship to help ride out the current uncertain economic times and return to profitability". It's provided by the Small Business Association (which even offers a toll-free phone number at 1-866-947-8081.) Washington is playing a big role in attempting to stimulate the economy, and some of that aid is being targeted directly to small businesses.

But you should also consult with small business advocacy groups and your industry's trade association for the latest information. New legislation is being passed, some of which may have a profound impact on your business. For example, the big changes proposed for U.S. health care could drastically affect payrolls. But one small business owner I know also complained that new government contracts may be shifting away from what's traditionally been considered a "small business."

Moving online makes sense. I know entire businesses which have closed storefronts and simply pointed their customers to a web site. With the right marketing, online audiences can be tapped and increased around the world. Many companies have also saved money by replacing phone operators with online support. And one entrepreneur even suggested virtual conferences instead of the expensive real-world gatherings (with their associated high travel costs!)

Shoppers are becoming more cost-conscious, and are expected to remain so for years to come. I've heard recent horror stories from a mortgage broker, but this is true for the consumer market as well as the real estate market. Future product lines should be positioned with "value" in mind, and marketing campaigns should consider new thrifty consumer. And since forecasting is now harder than ever, limited "test marketing" should be conducted whenever possible. Economists are predicting a slow recovery, with continuing unemployment, and the consumer market could still remain challenging for years to come.

Save costs wherever possible. Five years ago I worked at a company which offered employees the option of a cut in a pay in exchange for a four-day or 35-hour work week. And in February autoworkers at Toyota agreed to shorter work weeks in order to keep their plants open. Wages aren't the only area for cost-savings, but they're one of the biggest opportunities.