Publications on this site are provided in Hypertext Markup Language (HTML), Portable Document Format (PDF), and some are provided in both formats. You may download the free Acrobat Reader from the Adobe site to view a PDF. Contact your County Extension office for printed copies.
In These Economic Times Strategies for Strengthening Small Businesses
4 pagesAs the U.S. economy continues to struggle, so are many small businesses. Small businesses are the most vulnerable during tough economic times. Unlike their corporate counterparts, small businesses often lack the financial resources to survive a drawn-out economic crisis. Economic downturns challenge small business owners to consider two things:
- how to encourage reluctant customers to continue supporting the business
- how to reduce business expenditures
- how to prepare and reposition the business for success once the economy improves
During these times, the first thing small business owners should do is evaluate and adjust their thinking. They should always have a "lean and mean," worst-case scenario strategy built into their plans to ensure they can survive.
Even when times are good, many small business owners face challenges such as meeting payroll, maintaining customers, and making long-range plans. These and other challenges are much worse during tough economic times. Tough times will require small business owners to have the discipline to control costs, motivate employees, keep loyal customers, and recruit new customers.
Unfortunately, some businesses will decline and some will go out of business. But others will grow. Companies that survive tough economic times don’t “hunker down.” Instead, they intensify their efforts to sell, sell, sell! These businesses position themselves to thrive and grow after the restructuring is complete and the economy improves.
Business and Consumer Impacts
Small businesses feel the impact of an economic
downturn as large firms lay off
workers to adjust to the current crisis.
These workers are also consumers, and
they must adjust to the new economic
reality by cutting spending on goods and
services. As consumer demand decreases,
businesses reduce their need for inventory
and demand for labor.
Even though the primary factors that led to the current economic crisis are the fallouts in the housing and financial markets, the effects are felt throughout the local, state, and national economies.
During economic downturns, consumers have less disposable income and are less likely to buy nonessential items. In tough economic times, consumers will spend hours looking for deals. They are savvy enough to know how to wait on sales to save money and find bargains wherever and whenever they can. Therefore, for small businesses to survive during these times, they will have to cut their prices to attract customers and make a profit.
But cutting prices may not be feasible or make enough of an impact for some businesses. Since some small businesses have limited reserves and regularly operate at the margin, downsizing, restructuring, or going out of business may be the only options.
Economic Opportunities
While this assessment is not what some would hope
for or expect, the current economic crisis will create
opportunities for the surviving businesses. For example,
a major crisis tends to bring out the best in people
and draw them closer together.
As a small business, you should get to know your competitors and build relationships with them. In the unfortunate event they should go out of business in the future, those competitors are more likely to refer their customers to someone they know, like, and trust.
Partner with similar businesses in shared marketing in the local area. Substitute goods and services that you buy from out-of-state or outside the region with purchases from local or nearby vendors. This import substitution will benefit the local area and provide you with a great advertising tool, as well. With so much emphasis today on traceability and locally made or grown products, customers prefer and trust businesses that work with other companies in their hometown or state.
Finally, refer customers to other businesses in the area. This creates a win-win situation for everyone. For example, a customer walks into your store looking for an item that you do not have. To keep the retail dollars in town, refer the customer to a local competitor.
Survival Strategies
To take advantage of these and other opportunities,
here are some priorities and strategies for small businesses
to survive the current economic crisis.
Priority 1: Contain Costs
- Formulate a plan that puts all of your finances on paper (preferably in a spreadsheet) to get a full understanding of the current condition.
- Once itemized, identify areas to reduce expenses without affecting sales, quality, or customer service. If you need to cut costs, do it in $1,000 increments. That is, look at each item/expense in your spreadsheet budget and determine what percent each item would need to be reduced to generate $1,000 in savings. Then reduce those items with the smallest percentage reductions. Items with higher percentage reductions will usually hurt the business the most.
- Evaluate your cost of doing business. You may be able to reduce or eliminate some expenses, minimize the effects of the economic downturn, and survive and grow your business.
- Evaluate the fringe benefits package you offer your employees. These are costly, and reducing them will help to retain more of your profit.
- Only cut costs or lower your prices if it won't harm your business later. You can always lower your price, but you can't always raise your price.
- If you provide health insurance for your employees, switch to a higher-deductible plan to cut costs without cutting benefits.
- Analyze your costs. Consider cutting out goods that provide only marginal benefit to your business, and increase sales of the rest.
- Don’t take a “shotgun” approach to cutting costs. If you do need to cut costs, do it judiciously and strategically. That is, cut costs incrementally to minimize the impact on the business and improve its chances of surviving an economic crisis.
- If you have to cut personnel costs, offer to cut hours instead of having to lay off one or more of your employees. Many employees would rather cut back on hours to avoid layoffs. This will retain their loyalty and keep them in good spirits.
Priority 2: Improve Customer Service
- Remember, customer service is a continuous process.
- Staying focused on serving existing customers and selling to new ones is important to surviving and thriving in these economic times.
- Make customer service an even greater priority by ensuring that your employees are well-trained and courteous to customers. This will give customers a reason to come back. Research shows that customers are more likely to tell a friend about a pleasant experience than an unpleasant one.
- Don't forget your customers whose economic hardships force them to stop shopping with you. A friendly phone call, a few words of encouragement, or a contribution to local charities to help them will be remembered long after the economic crisis is over.
- When it comes to customer service, you should maintain a balance between personal transactions and automated transactions. In many businesses today, customer service seems to be a thing of the past.
Priority 3: Maintain Competitive Prices
As a small business, your prices should be competitive with other stores in the area. Customers often judge prices by one or two items or on price-sensitive items in smaller towns. If your prices are high on those items, the customer will assume that your prices are high on everything else in the store.
But small businesses should not try to compete solely on price. Instead, demonstrate “value” through customer service and other priorities.
Priority 4: Attract Customers
- Offer overstocked items as sale items or in “buy one, get one free” specials.
- Take care of your loyal customers. This will help you stay among the living in these economic times.
- Spend your time on what matters. Eighty percent of your business comes from 20 percent of your customers, so treat your best customers like royalty.
Priority 5: Improve Product Knowledge
- As a small business, you must become more knowledgeable about the products you sell in the market. This will help you to better differentiate your product or service from competitors.
- If you don’t know and understand your customers, it will be very difficult to sell your product or service to them. Customer surveys are a good way to get to know your customers.
- Know your industry so you can stay on top of the latest trends and maximize your bottom line.
Priority 6: Improve Employee Training
- Evaluate your workforce needs. Small businesses tend to have one person doing several tasks; the person may be great at some and not so great at others.
- Training your employees well is critical to the success of your business. When economic times get worse, you don't want to hire and train new employees over and over again.
Priority 7: Improve Employee Motivation
- Invest in and take care of your employees and customers now, and you will be in a good position when things turn around.
- Motivating your employees with incentives, such as a day off with pay or employee of the month honors, can create an environment of friendly competition.
Priority 8: Build Financial Reserves
- Keep a sufficient financial reserve. Some call it a “war chest” or “rainy day fund.” Keeping some profits aside to help you through cash flow deficits will give you more flexibility to operate your business during tough economic times.
- Create a financial reserve by establishing a line of credit before you need it. This way if you have an unexpected delay of cash in your business, your operations will continue to run smoothly until the economy turns around.
- Keep your funds as liquid as possible and build up capital reserves.
Priority 9: Maintain Community Engagement
Continue to stay engaged in the community. Don't turn away solicitors for charity functions; instead offer gift certificates to your store for door prizes. Keep your business's name out there anyway you can.
Priority 10: Manage Inventory
Keep inventory to a minimum. Monitor and maintain inventory of those items that are in high demand.
Priority 11: Advertise
- Continue to advertise to help your business grow, let people know you are still in business, and maintain your market share. These are the primary reasons large companies advertise.
- If you must cut costs, do not cut advertising. You must keep your name and the service you provide in the minds of the consumer.
Priority 12: Manage Accounts Receivables
Revisit your accounts receivables regularly. This may mean sending out invoices more frequently than you have done in the past.
Priority 13: Improve Business Appeal
- Improve the general appearance and cleanliness of your business so it looks nice and inviting to customers.
- Keep your storefront clean and windows repaired, and change out your display windows as much as possible. Customers will notice if you don’t take care of your store.
Priority 14: Business Signs
Make sure your business signs are easy to read so prospective customers can find you.
Priority 15: Be Available
If you want customers, you need to be open when your customers might come. Don’t lock the doors at 5 p.m. This could pose problems for local customers, especially those who work out of town.
Priority 16: Work with Vendors
- Reevaluate your contracts with suppliers who are likely experiencing similar economic problems. They may be open to negotiating a better price to keep your business. If your current supplier won't renegotiate your price, don't hesitate to look for other suppliers.
- Negotiate better credit terms and discounts with lenders and suppliers.
Priority 17: Attract and Keep Customers
- Focus on retaining your loyal customers and attracting new customers to your business. Research suggests that it takes about six contacts before a sale occurs.
- Give customers bigger discounts for cash payments if you do not already.
- Share any cost-savings with your customers in the form of lower prices.
Priority 18: Improve Product Offering
- Diversify the goods and services you offer and become a one-stop shopping experience.
- Offer good, quality merchandise. Don’t stock items that nobody wants.
Priority 19: Assess Business Status
Assess where your business is in the current economic crisis. If your business is suffering, ask questions like: How much have I lost since the last calendar year or the last quarter? How rapidly did the economic downturn affect you? How are your cash reserves and your available credit line?
Conclusions
The thought of owning or starting a business in today’s economic climate is scary, and there are no “quick fixes” to the current crisis. However, the keys to success remain unchanged:
- a good product mix
- good customer service
- good advertising
During these times, small businesses must think critically and act strategically to stay in business. Economic downturns affect small businesses more than larger businesses, but they do not have to be disastrous.
Small business owners should remember that at some point things will improve. Few recessions in the United States have lasted more than 2 years, so there is room for optimism.
Even though the current and future economic outlook is bleak, some small businesses will survive and thrive in this environment. Those who do will contain costs, control inventory, retain current customers, recruit new customers, improve customer service, be creative and innovative, and continue to advertise in these tough times.
Copyright 2010 by Mississippi State University. All rights reserved. This publication may be copied and distributed without alteration for nonprofit educational purposes provided that credit is given to the Mississippi State University Extension Service.
By Dr. Albert Myles, Extension Professor, Agricultural Economics.
Discrimination based upon race, color, religion, sex, national origin, age, disability, or veteran’s status is a violation of federal and state law and MSU policy and will not be tolerated. Discrimination based upon sexual orientation or group affiliation is a violation of MSU policy and will not be tolerated.
Publication 2580
Extension Service of Mississippi State University, cooperating with U.S. Department of Agriculture. Published in
furtherance of Acts of Congress, May 8 and June 30, 1914. MELISSA J. MIXON, Interim Director
(POD-03-10)