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What to Do in a Down Economy or The Magnificent Seven

Written by: Sam Allman

Article Overview: It’s easy to survive when business is good. There is never going to be a magic solution to save everyone when times are tough. The measure of a business is whether they flourish in bad economic times not in good. Maybe that’s why the average lifespan of a business is only seven and a half years. “If your business is not eight years old, the odds are it will never be.” I will share with you several strategies the will not only help you survive, but thrive in this down economy.

What to Do in a Down Economy or The Magnificent Seven

Strategy One: Never run out of cash. Cash rules; cash is king. Like an expensive import car, no matter how great the product, no business can be successful without its fuel – cash – to keep it running. The business that runs out of cash, whether a small mom-and-pop or a long-established Fortune 500 company, is stuck. Every year, thousands of good-sized, first rate companies go bankrupt, and the core reason is almost always the same. The owners or managers never learned how to think and plan in cash-flow terms. Consequently they run out of fuel.

Most businesses don’t run on profit; they run on cash. They don’t run on increased volume; they run on cash. Companies don’t run on the most realistic prospects for the future unless the immediate future contains enough cash to pay their bills.

What is cash-flow? It is the difference between the cash flowing into and out of a business over a certain period. Doing a cash-flow analysis is proactive, failing to do it makes you reactive. Watching, projecting and never running out of cash leads to strategy two.

Strategy Two: Daily monitoring of their breakeven point: How many know your breakeven? Breakeven is the volume of business you need to do, at your current gross margin, to pay your bills.

Breakeven = Fixed expenses______________
Average GM% - Variable expenses% (Selling costs)

Example: Lets suppose that your fixed expenses are $20,000/month (rent, salaries, telephone, insurance, etc.). Your average gross margin, including labor and freight, is 35% of sales. Your variable expenses are sales related, like commissions and advertising, is 7% of sales.

Breakeven = $20,000 = $20,000 ________ = $68,966 in sales to pay bills
35% -6% 29%

Daily monitoring of your breakeven leads the strategy three. Strategy two is directly affected by strategy three.

Strategy Three: Daily monitoring of expenses. Eliminate waste. “Waste is worse than loss.” Ben Franklin

Every dollar saved from current operating expenses goes directly to the bottom line.
You must justify every expense – every day, every month, every year. You must eliminate nonessential expenses as soon as you identify them. Start with an analysis of your five largest expense categories. Are you getting the maximum return for each dollar spent? Time is money and eliminating time wasters saves you money.
When you misspend one dollar you have really wasted two – the dollar you misspent and the dollar you could have spent well.

Strategy four affects strategy three, strategy two and strategy one.

Strategy Four: Daily monitoring of gross margin. “Business is not a game of volume. Business is a game of margins.”

If you were selling at an average of 35% gross margin, it would require you to do eighty-one percent more business to offer a 10% discount. In bad economic times the tendency is to increase promotions and lower price. Would a ten percent discount to your customers enable you to double your volume? “If you’re going to go broke anyway, why go broke tired? Go broke rested!”

Strategy five affects strategy four.

Strategy Five: Daily monitoring and measuring of sales force productivity. “Your reputation is shaped by the customer’s personal experience with your people. When performance is measured, performance improves.”

Pat Riley took a average NBA team to the finals. He did it by measuring what other teams didn’t measure; he measured hustle. Think what an average team would measure. He measured the number of rebounds his players went after and didn’t get, he measured the number of times his players would dive for a lose ball. You get my point. What should you measure in your business?
1. Monitor daily sales with corresponding margins
2. Monitor and challenge everyone to increase the average sale (Asking for French fries)
3. Increase and monitor the store closing rate (The number of people they talk to versus the number who buy)
• Do they get the name an address of everyone they talk to?
• Do the salespeople follow up with thank you notes or phone calls with every prospect?
4. Monitor if salesforce is asking for referrals from each satisfied customer
5. Monitor what the salesforce is doing in-between customers

Strategy Six: Daily monitoring and maintaining of accounts receivable. “You are not a bank.” Establish a cash policy and stick to it. For your retail sales you should have zero accounts receivable. Offer a private label credit card. Not only will it increase your average sale, it makes you customer more loyal. “Credit customers buy more, buy better and are more loyal.”

Strategy Seven: Monitor inventory turnover. Don’t buy more than you can afford. Set yourself up and open-to-buy. Project your cash flow. Rule of Thumb:
1. Determine the gross profit % of item considering to purchase
2. Multiply the gross profit % by 360 days
3. Ask yourself, “Can I sell this item in that number of days? If yes, buy it. If not, don’t buy it.

The secret in thriving in a down economy is discipline, the discipline to monitor the key drivers in the business. Most of us think working harder, and selling more is the answer. The key is doing the things that will bring the greatest results. Forget these seven strategies in down times, and your history.

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Article Tags: breakeven point, cash flow analysis, commissions, core reason, fortune 500 company, gm, gross margin, immediate future, import car, insurance, mom, prospects, salaries, variable expenses



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