Recession-proof Your Small Business

by Stephen W. Browne CPA, ABV, CITP, CFE, CISA

Home value deflation, liquidity crises, credit contraction, $3.50 for a gallon of gas, $10 for a bushel of wheat, and 40 cents for diapers (I have three kids under the age of 3). Ancient Greek mythology states, “At the first, chaos came to be.”

 

If the Greeks were right, then maybe we’ve come full circle. Or, maybe this is just what a 21st century recession looks like. In either case, if you run a small business, the following can help you to prepare for recession (or whatever economic chaos comes next).

Focus with the Pareto Principle
Vilfredo Pareto was an early 20th century economist who observed that 20 percent of the people in Italy owned 80 percent of the wealth. His observation, now commonly known as the “80/20 rule," essentially states that 20 percent of the causes (variables) will create 80 percent of the results (effects). The Pareto Principle can be applied to almost anything in your business. Do 20 percent of your clients produce 80 percent of your results? Do 20 percent of your products generate 80 percent of your shipping costs?
Do 20 percent of your administrative tasks take 80 percent of the available time? You get the idea. Managers can employ the Pareto Principle wherever they seek to improve an operation. In a recession, the principle can promote efficiency and reduce costs. At its core, it is simply about prioritizing the vital few over the trivial many.

Know Cash Flow or No Cash Flow
All business owners should review their bank and credit card statements. Invariably in fraud investigations, we find that no one was watching these records. Already this year, we have completed
two investigations where 10 percent of revenues were misappropriated. The evidence was in the bank statements. Beyond functioning as a control against malfeasance, reviewing these statements provides insight to a business. This process can be augmented by reviewing a report that shows the total annual amount distributed to each vendor, the frequency of distributions, the average amount disbursed and the vendor’s contact information. The first time this process is performed, the following are typical responses from management: “What does this vendor provide us?” or “Why are we paying this every
month?” or “Who approved this?” or “Why did the cost increase?” The obvious benefit to this exercise is a future reduction in overhead and, in turn, increased profits.

Actions and Words
If your business is facing adversity, you can take several actions to improve your cash flow, including:

Sales: Focus on a niche or a demand that is generally recession proof (food, fuel, storage, medical care, etc.), keep tabs on competitors’ prices, discount or discard slow moving inventory.

Collections: Tighten credit policies, resolve billing disputes promptly, shore up collections practices, put yourself in charge of customer relations, and use e-mail to speed collections.

Disbursements: Trim insurance coverage, scrutinize utility costs, pay bills only when due, renegotiate credit terms.

Payroll: Utilize non-cash rewards (recognition), reduce travel and entertainment, eliminate overtime, cross-train employees, reward costcutting ideas, use contract labor.

Communication is the key to implementing any of these improvements. Often, we don’t talk with others when we really need to. Reach out to those for whom your actions have impact. Let them know you are facing adversity and that you care about the ramifications of your actions.

Finally, a major factor in recession-proofing your small business is time. When adversity is on the horizon, you need to be proactive. Two of the great strengths of a small business are often speed and flexibility. Use them both. Now.

 

Stephen Browne is Director of Attestation Services, Meara. Welch. Browne, P.C.
P     |     913.814.874
E     |     steve@meara.com