Time To Make Lemonade
Jim Olsztynski

January 1, 2008

Hard times are back, so make the most of it.

The party is over for many of you, especially if your business is tied to the housing market. Commercial work is still strong in most of the country, but there are signals that sector may peter out a bit before long. Many of you have only a dim memory of what it’s like to scramble for work. If you started your business during the last 10 years or so, you probably have no experience with hard times. Your biggest problems likely have been finding enough people to handle all the work available.

A business slump is never fun, but if you approach things the right way you not only can survive, you may end up stronger in the end. Here are some basics to keep in mind.

Stay away from debt. Some of you borrowed to the hilt for expansion during the boom, and that can be a killer during a downturn. Put a damper on those credit cards and try reducing principal as well as paying off interest. The rule of thumb among professional bean counters is that debt - including long-term debt such as mortgages - shouldn’t exceed 50 percent of business equity, even in good times. If you’re above that benchmark, treat it as a budding crisis and make debt reduction a priority.

Address fixed costs. Some of you may have gone upscale when business was booming. Now it’s time to distinguish between what’s nice to have and what’s absolutely essential to run your business. A key here is to notice where unnecessary expense piles up, and for that you need a regular profit-loss statement of at least monthly frequency.

Some contractors don’t see P&Ls more than quarterly or less. If your books are set up properly, you should be able to spot activities that consume more of your budget than they should. Don’t look only at the hard dollars, but also the percentage line. When you see an expense line item creeping up as a percentage of revenues, it’s time to take action.

Address the right fixed costs. Payroll is the most expensive fixed cost for most of you. Temptation will be great to lay off staff in times of trouble. Sometimes that needs to be done, but be careful. Good people are your most valuable asset, terribly hard to find and they will be needed when the market turns up again.

Marginal performers can be let go, but before making the hard decision on someone you rely on heavily, examine whether you can negotiate some compromises in the form of part-time employment or switching to commission/bonus compensation. Invite them to help drum up more work, and let them share in the proceeds.

Less is more. When the market turns down, temptation increases to bid more and more jobs at lower and lower prices. A better strategy might be the opposite approach of targeting a niche with fewer competitors and more profitability.

I recall a conversation with a mechanical contractor from Southern California during that region’s deep slump in the early 1990s who took on a lot of work installing drainage systems in parking garages. These weren’t glamorous or high-volume projects, but few competitors took much interest in the work and this firm capitalized on the opportunity. The contractor told me it was about the only thing keeping them afloat.

Stay the quality course. Tough times make it tempting to drift toward cheaper materials and corner-cutting. This is exactly the opposite way to go. It’s never a good idea to produce less than the best, but you can get away with it better in a seller’s market when work is plentiful than you can when customers have a large number of contractors chasing their jobs. Put some of that dead staff time to good use with training and education. The best time to embark on a quality improvement program is when you’re not scrambling from job to job trying to fulfill overbooked commitments.

Practice counter-cyclical marketing. It seems that everyone slashes advertising budgets when works slows down, then jacks them up when business is booming. Shouldn’t it be the other way around?

The obvious reason businesses cut back on advertising when times are bad is because they have less money to spend. This argues for setting aside a “rainy day” fund when business is booming. If work is still holding up for you, think about this.

Nobody wants a recession, but they are nature’s way of getting rid of bad economic habits. It’s a time to turn lemons into lemonade by implementing sound business practices that tend to fall by the wayside when everyone is too busy chasing their tails.