So the Economy is Slowing Down!
by Dr. Jerry Osteryoung
By far lately, the most asked question of the Jim Moran Institute is how should an entrepreneur respond to a declining economy? There are two natural ways that usually come to mind: expanding sales or reducing costs.
While these alternatives seem obvious, we strongly recommend that before you do anything, you spend some time reflecting on your choices. Too often, we see cases where entrepreneurs respond without a lot of analysis with corresponding negative results. Spending some time mulling over the choices helps in making a decision and slows down the natural tendency to react to a situation.
The most obvious way that most entrepreneurs try to deal with a slowing economy is by increasing sales. Frequently, entrepreneurs want to increase their advertising or reduce their prices. However, this just does not seem to work for most entrepreneurs in a slowing economy as everyone else is trying to buy market share. It is like going to your favorite fishing hole with the fish not biting and you decide to go where everyone else is fishing. With a finite number of fish, putting more fishermen in one local area is just going to reduce the catch per person.
It is better with a laggard economy to reduce expenses rather than try to increase revenues. If you have a 5% net profit margin and you want to improve profits by $20,000 then you have two choices. You can increase sales by $400,000 or reduce expenses by $20,000. Obviously, it is much easier to cut expenses and this is what we recommend for most entrepreneurs to concentrate on doing.
When going through the expense cutting process, avoid cutting costs that are related to customer service. However, some of the areas to look at cutting expenses are areas that you just kind of accepted. Some of these items might include advertising that is not effective, insurance costs, and employees that are not needed any more. When we assist businesses in this process, we go through each expense a business has on a recurring basis and ask them, “how relevant is the expense to the business?” Most entrepreneurial firms can easily cut about 20% of their expenses without affecting their mission. Is this an easy process, no? It is a painful and difficult process, but one that must be gone through in order to survive in our slowing economy.
One way to reduce expenses dramatically is to downsize your business. We have seen businesses that have gone from $2.5 million in sales to $500,000 in sales with increasing levels of profitability. In these cases, the entrepreneurs had lost control of the business at the higher level and were much better able to manage a smaller business.
In today’s economy, cutting expenses will help small businesses to increase profits and remain viable.
This article appears courtesy of the The Jim Moran Institute for Global Entrepreneurship.