"12 ways to Gain Ground in a Slowing Economy"
By Paul Dimond, Vistage Web Editor
Vistage speakers Alan and Brian Beaulieu and Jeff Dietrich, all economists at Institute for Trend Research (ITR), see the economy as diversified and resilient enough to fend off, for another year, the pressures of the sub-prime credit crisis, the weakened dollar and the ongoing housing slump. But they predict that these and other pressures (including inflation) will create contraction in 2009.
Vistage members excel at finding opportunity in adversity, and historically, economic downturns have offered strong opportunities to grow businesses and personal wealth. With growth in mind, Vistage View presents 12 opportunities for members to consider or plan for in the coming months.
Borrow smartly/Renegotiate your loan terms
With many banks having to take write downs from the sub-prime crisis, they are going out of their way to attract new, more reliable business loans to offset those losses. Yet at the same time, banks are tightening their terms and restrictions to prevent another bloodletting. "This translates into tighter loan covenants, greater reliance on assets including personal guarantees, and lower advance rates on assets such as inventory and receivables," says Vistage speaker and turnaround expert Marvin Davis.
The best time to meet with your banker for contingency planning is before you need money or run into financial troubles. Davis advises business owners to examine their cash flow needs and project what a 10 percent decrease in sales might mean. Business owners have two basic options when cash flow constricts: internal restructuring or resetting of loan covenants and/or payment schedules. "Bankers are often willing to stretch out or balloon principal payments, but they usually want to see what the business is going to do internally to mitigate their financial condition," Davis says. "If the company is a good customer, the bank may even renegotiate the loan."
Traditionally companies with less debt weather downturns better. David adds, "I generally suggest that companies attempt to de-leverage themselves and seek internal sources of cash by tightening up their businesses or selling off assets or divisions which are not seeing acceptable returns."
While the prime rate may be low now, this does not necessarily mean you will be able to lock in that rate. Many business loans have a floating rate tied to the prime rate. "If we enter a period of inflation, borrowers who are overleveraged will face a great deal of distress."
Davis adds that it's wise to have a second lender waiting in the wings in case the bank doesn't like your industry or begins to view your company as a risk.
Acquire a troubled company
Companies in solid financial condition can do more than just survive economic contractions; they can gain assets and market share by acquiring weak or over-leveraged competitors. Acquiring another firm requires a team of advisors and four phases of action: (1) Ensure that your company has a sound balance sheet and strong cash flow; (2) identify financially troubled companies; (3) secure capital from a lender; and (4) buy the assets of the firm.
Renegotiate deals
Renegotiating deals with your current suppliers can offer numerous benefits. You can extend your payment terms and thereby avoid borrowing money to pay your suppliers, or you can negotiate a lower cost of goods and increase your profit margins.
"If your company has cash, try to negotiate a discount for prompt payment and don't prepay for supplies," says financial planner and Vistage speaker Josh Patrick, "If you don't have cash, then negotiate extended payment terms."
There are four basic points to leverage in renegotiations. Those are timing (is the contract set to expire soon?), under performance (are there shortcomings in the product, delivery or service?), contract imperfections (are there omissions, unintentional bindings or errors in the contract?), and business shifts (have you moved in or out of a new market, or do you have new pressures or needs?). Take advantage of these negotiating points or hire a refinancing expert to earn favorable deal terms.
Boost your advertising
Companies can take business from weak competitors and position themselves for future growth by advertising more when competitors start advertising less.
"Recession after recession proves that companies that don't cut advertising reap disproportionate rewards later," says Vistage speaker Richard Wemmers. However, he cautions that this tactic works best when three conditions are present: (1) your product/service competes in a category where brand preference drives purchases, (2) your product/service category has a lot of "advertising noise" associated with it; and (3) Your competition has cut its ad expenditures significantly (between 40 to 60 percent). With these conditions present, an increase in marketing can pay off well.
Diversify your assets by purchasing an office or facility
In 2007, residential real estate prices fell an average of 6.7 percent from a year earlier (Source: S&P/Case-Shiller home-price indexes)-the steepest drop in decades. Commercial real estate sales are now slowing after a record year. As the prices come down, consider personally purchasing an office and having your company pay you rent. According to ITR, short-term interest rates are projected to remain steady through mid-2008, when inflationary pressure may cause the Fed to raise rates. Take advantage of reasonable rates while they exist.
Owning your facility is a solid way to insure income for your retirement. "It's more advantageous to pay yourself rent than it is to pay someone else rent," says financial planner Patrick. "When the business owner leaves the company, the rental income the building produces is sometimes worth more than the business itself."
Fund your retirement accounts
As investors, we share a collective belief that the economy will be fine in the long run, and that major market declines are only temporary. Yet when they occur we tend to shy from investing in beaten down stocks or bonds. But market declines are precisely the time when it's most beneficial to invest.
Recessions represent some of the best investment opportunities. You don't have to time the market or even cherry pick the right stocks. All you need to do to take advantage of this investment opportunity and tax break rolled into one is to max out your contributions to your 401(k) and IRA. Improved returns will follow.
"In most asset-allocation models, stocks are held for growth, bonds for income and cash for safety and liquidity," says Vistage member and financial planner Chad Coe. "Your investment strategy and asset allocation should be based on how many years you are from retirement, and you should fund your accounts fully in both up and down markets."
While some investors might look for historical trends on sectors that have done well during recessions, and other investors might seek beaten down or undervalued stocks, and still others might hedge with precious metals, the experts don't necessarily advocate timing the market. "We encourage a diversified investment approach based on years to retirement," says Coe. "Being consistent and using a simple approach is the way to build wealth."
Upgrade your personnel
Take stock of your staff with an eye to increase both your available cash and your profitability. Are some executives or team members not adding value to your company? It might be time to think about which of the weaker performers can be replaced by high performers.
"Divide employees into three categories," says turnaround expert and Vistage speaker Edmond Freiermuth. " 'A' performers are motivated, highly skilled and indispensable under all but the most draconian scenarios. 'B' performers are less experienced but up-and-comers able to handle new responsibilities. 'C' performers should only keep their jobs during periods of strong economic growth. The split among these employees is roughly 10 percent, 80 percent and 10 percent, respectively. The C performers are the ones who should be let go if your business experiences ongoing or escalating challenges."
Be aware, though, that laying off decent workers can be a double-edged sword, warns DePaul University Finance Professor Bill Poppei. "The natural reaction of companies is to start eliminating personnel. They look for variable costs to eliminate, and human labor is usually the most expendable."
Getting rid of good employees comes with its own costs. "When you fire people," Poppei says, "all the money you put into their training goes out the window."
Increase your "connect quotient" with your employees
Your employees may be as nervous or embroiled in a downturn as you are. That's why you should consider hosting employee seminars on topics such as "The Care and Feeding of Your Credit," "Preventing Home Loan Default and Foreclosure," and "Negotiating the Foreclosure Process." These programs will be of significant short-term or long-term value to your employees who may be facing great uncertainty.
Programs like these show the employees that the employers care about their lives, their families and their future. Employees who are acknowledged and feel cared about tend to return the sentiment in positive forms to their employer.
Expand internationally
Any company with the potential for an international sales presence should look into establishing one. Other economies may not have the issues that the United States will experience; and while the dollar is weak, American goods and services are highly affordable abroad. Foreign sales are a sort of insurance policy for many companies.
"One long-term solution to getting through a domestic contraction is to hedge your business," says foreign market expert and Vistage speaker Bill Decker. "The one-country approach doesn't make sense in today's global economy. If you're selling in several international markets, you minimize the negative effects of any one market crashing."
Decker says that seeking export opportunities and outsourcing labor might be two components of a hedging strategy to lessen the effects of potential economic downturn.
Bring your labor back to the U.S.
Any time money is weak in one place it's strong another. Think about bringing your labor back into the states if the weaker dollar makes labor abroad more expensive. Even if you don't have employees offshore you are most likely contracting with manufacturers or service providers outside the U.S. borders. Consider shifting to U.S. suppliers of those goods or services, particularly since they are likely more willing to negotiate a better deal in tight times.
Don't lower prices, add value
Many companies are tempted to lower the price of their product or service during tight economic times. But lowering your price tends to hurt your brand, unless you can find a way for the price reduction to make sense to your buyer. If you have to lower prices, do so with a rationale that the market can embrace.
Better to add value than to lower the price. "Avoid actions that deflate the value of your product and the company's overall equity," says Rick Wemmers. "Create new value propositions that make your prices appear lower. Low price alone isn't the only way to win orders in these times and it may be difficult to raise your prices later."
Make the most of your Vistage group
Tell your fellow Vistage members what you anticipate your business problems might be. If you're not sure what problems you might face, ask for help in anticipating issues that might arise. It's never too early to plan for contingencies.
Best Practice Chair Bob Dabic advises these actions for members:
- Track key performance indicators (KPIs) on a monthly basis, and compare plan versus actual figures for revenue, operating (budget) expenses, net profit, cash, and leading indicators (e.g., backlog, outstanding proposals, new prospect contacts, etc.).
- Provide a brief update of your company's KPIs during the Significant Events portion of the meeting (so your fellow members can be informed of possible issues or opportunities to be processed during an Executive Session of the meeting).
- Report the top three priorities you're focusing on to grow revenue, profits and cash in the short-term and long-term. Discuss this at both group meetings and one-to-ones.
Tracking your company's metrics can be time consuming but the practice is imperative for making and calculating your most important business decisions.
Contracting economies offer opportunities for those businesses is sound financial shape, but those opportunities exist in a relatively short window of 12-18 months. Taking advantage of these prospects may require some investment and resources, but the rewards are worth it.
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