April 2002   

It can rattle anyone's cage, but if you're a small business owner or a budding entrepreneur, it's especially unnerving. While the economy goes sliding down a steep slope, how will you survive?

The Economic Picture

The economy rises and falls more frequently than a high-speed roller coaster. Consumer indexes seem to indicate that people don't believe we're in for a recession, yet the Federal Reserve Board's actions -- reducing interest rates -- show its concern for the near future.

"The economy has obviously slowed," says Nelson Braff, executive vice president of New York's Perrin, Holdin & Davenport Capital Corp. "It doesn't matter if you call it a recession or a slowdown. We are where we are. It's going to get worse before it gets better."

Braff is not sure that's a bad thing. "I had a college professor who started a class by saying, 'The purpose of business is making money.' I thought that was obvious, but today it's something not everyone understands. The easy availability of venture capital caused people to lose sight of that basic principle."

Coping with a Downturn

If the economy continues to decline, returning to that basic principle of business may mean the difference between swimming and sinking. "You have to be better at what you do," says Braff, "and you have to be profitable from day one, because you won't be able to count on getting investment dollars. When you can raise money from the outside, you have the luxury of being wrong, but that luxury doesn't apply when venture capital isn't available."

For now, Braff believes that caution rather than panic is a good approach. "Consumer confidence is fine, people are still working, shopping, spending money," he says. "But now is the time to watch expenses carefully, look where your money is going. We should always be doing that, but people are more inclined to do that when the economy is slowing."

He notes that it will be especially hard for new companies to get funding. "Dot-coms may disappear or simply never launch due to lack of funding," he says. "This is actually necessary, due to the endless amounts of money that were poured into businesses just a few years ago. The Internet was growing too fast. It's not going to go away altogether, but businesses on the Web will have to be much more savvy about what they're doing."

Spending Money to Make Money

Being savvy includes the ability to know how to spend what money the business has available, says Marcia Layton Turner, business consultant and author of The Unofficial Guide to Starting a Small Business. "Although the sales and marketing budget is what most companies cut first when the economy takes a downturn, increasing the budget actually makes more sense," she says. "Since most companies cut back, those businesses that become more aggressive can really shine against the competition. When times are tough, advertisers may also be more willing to negotiate and may have better promotional deals available."

Turner agrees with Braff when it comes to monitoring expenses. "Instead of cutting areas within the company that will make or break you, focus on reducing expenses in other areas, such as travel. Instead of buying new equipment, rent or lease it; don't hire new employees unless you really need them, or hire contractors and temp workers to fill in where needed. Try to eliminate overtime to reduce labor costs."

But even more important than the tangible costs of expenses is the drive for new business. "Even during tough times, there is still business to be had," says Turner. "Take time everyday to contact customers about additional needs they may have, and consider partnering with competitors to bid on larger jobs. Anything you can do to attract new business is a smart move, because when the economy starts to recover, you'll already be miles ahead and ready to take on additional orders."

The Intangibles of Survival

Both Braff and Turner point to an important intangible factor in surviving a slow economy: customer service. "You have to be better at your business than anyone else is," says Braff. "You have to know your market, know your customer, know what they want and make sure they get it."

"Finding new and less expensive ways to provide the same level of service is one way to go," says Turner. "Helping customers better service themselves seems to be increasingly what customers want. Offering free seminars can help answer customer questions, position the company as an expert, and reduce expensive follow-up calls in one fell swoop -- and seminars are relatively inexpensive to plan and orchestrate. Setting up a 900 number for service phone calls is one strategy software companies have adopted. Customers get the answer they need, and the company charges for it."

When the Business Is Failing

If a business owner is watching the business drain away, in spite of cutting costs and other similar efforts, he or she may reach a point where looking at the bottom line in a hard, clear-eyed way is necessary. "The key is to separate the economy from the existing business situation," says Turner. "If the company had been doing well before rough times hit, then new marketing strategies are needed before the owner should consider just giving up. If customers were defecting before the economic downturn, then the economy can't really be blamed if things get worse."

Turner wouldn't recommend giving up without trying new strategies. "Identify potential new markets," she says. "Consider expanding geographically to get away from the effects of a poor local economy. Look for ways to differentiate the company and its products or services from what the competition is doing. For example, a restaurant could offer free delivery within a five-mile radius, or a florist could give a free mini-bouquet to every customer who places an order. Something to generate additional interest and confidence in the company."

But perhaps the most important thing to consider is that the economy has always been cyclical. "The good news about the economy is that eventually it gets better," says Turner.