How to Beat the Bad Times

While the stock market enjoys an extended rally, many small businesses across the country struggle to survive. Simultaneously, some businesses manage to flourish in the face of these negative conditions.

The National Federation of Independent Business (NFIB) has been collecting small business economic trends data for 35 years. They published their quarterly report in April and the monthly update has been released. Union Bank of California conducts an annual survey of 2,000 small businesses in California. Their survey results were released in March. While the NFIB study is more in-depth, the results of the two reports mirror each other, enhancing the validity of both sets of findings.

From the NFIB Small Business Economic Trends:

• The Index of Small Business Optimism is tracked by the NFIB. Its low of 80.1 was reached in 1980Q2 (1986=100). The second lowest score was this March. It was 81.0. There are ten components in the index. None of them delivered a strong signal of improvement. However, April saw a bump up to 86.8.
• First quarter job losses were the worst in survey history. Although 6 percent of owners increased employment by 3.4 workers, 28 percent reduced employment by 4.3 workers. In addition to reducing employment, owners are also lowering compensation.
• Owners continue to defer capital outlays that are not essential to the survival of their business. Only 1 percent characterized the current period as a good time to expand facilities. That’s notable because it’s just 1 point higher than the record low reached during the 1980-82 recession.
• Real sales are the worst in survey history. Business owners continued to liquidate inventories at a record pace through the use of widespread price cuts.
• Falling profits were reported by 63 percent, while 11 percent reported higher profits. The poor profit picture results from the combination of reduced consumer spending and dramatic declines in selling prices. In addition, 11 percent of owners reduced compensation and 11 percent increased compensation, another survey record low.
• The economic slowdown has caused many borrowers’ credit worthiness to deteriorate over the last year, leading to more stringent terms and higher loan rejection rates. While 30 percent report all their borrowing needs met, 8 percent report problems obtaining desired financing. Fewer loans are being made and there has been a decline in demand. Record sales declines weaken balance sheets and income statements causing a ripple effect through the economy.
• More important than capital spending and inventory investment at or near record lows: both data points have remained low over a longer timeframe than any period during the 35-year NFIB survey history.

Union Bank’s survey is a mix of forward looking information and historic data, and it’s limited to California businesses rather than the nation. Highlights from their survey: 

• Job cuts are anticipated by 14 percent of owners during 2009 and job additions by 15 percent, the lowest in this survey’s history.
• Capital expenditures will be cut by 22 percent of businesses compared to 12 percent last year. And 60 percent will not change their capital outlay, while 17 percent plan an increase – far below 26 percent in 2008 and 35 percent in 2007.
• Only 38 percent of businesses reported sales increases in 2008. That was down from 51 percent in 2007. The average increase was 22 percent. Another 38 percent reported sales declines during 2008, with an average sales decrease of 21 percent.

When small business owners in the Union Bank study were asked about their challenges, they stated their “biggest challenges are the deteriorating state and national economy and burdensome state and national taxes.” Respondents said they “need the Obama Administration to focus on small business tax cuts, lowering health care costs and creating tax incentives to encourage small business investment in job creation.”

That’s certainly a gloomy outlook for small businesses. However, you notice that in those statistics there are companies with increased sales, higher profits, and plans to both raise salaries and capital expenditures. The important thing for you, as an entrepreneur, is to figure out what it will take for your business to be part of the success crowd rather than the struggling crowd. Every company, industry, and market possesses its own is unique attributes. 

Yesterday I received an email from a business owner who, like most of us, was wearing far too many hats. Unfortunately, when his profits were high he didn’t invest excess capital in strategic systems and people to help him manage and grow. His business developed multiple tentacles. Now that sales have cratered he doesn’t have the right people or systems to keep the whole enterprise afloat. It seems the only path to survival is cutting back his business to one small manageable and profitable piece. It’s do-able, he can manage it himself, it will produce enough income to support his family until the economy turns around and he decides the best way to grow his business of the future.

Each company is different. And making changes can be painful. If your business is struggling to survive, take out your virtual business scalpel as you examine what can be eliminated so you can thrive your way back to success.