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Thinking Ahead–Letter from Chaille: Dealing with Economic Doldrums
Pallet and lumber companies all over the country are feeling the squeeze of the current economic recession. Here are some ideas on ways to weather the storm and be one of the companies that comes out on top.
By Chaille M. Brindley
Date Posted: 11/1/2008
Pallet and lumber companies all over the country are feeling the squeeze of the current economic recession. We have heard companies talk about customer orders slowing down and for some almost drying up. Very few people thought at the beginning of the year that Wall Street would go through a financial meltdown.
The economic reality has been hard for the housing and financial sectors. The impact has started to filter over into other industries as well. There is some good news. Exports appear to be on the rise and have been the primary driver behind those companies that are seeing an increase in business.
Wanting to take the pulse of the current pallet industry condition, our staff conducted a financial survey in October after the Bush administration announced its financial recovery plans. The entire results were published in the Pallet Profile Weekly (www.palletprofile.com). Overall, the survey discovered some interesting trends.
Commenting on the overall impression of the U.S. economy and how it has impacted their business, respondents claim that they are doing better than the overall economy. Only 40% view their business to be in a moderate recession versus about 71% believing the overall economy to be in that condition. Almost twice as many respondents consider the economy to be in a steep recession when compared to their companies. About 30% characterized their business as being flat, versus about 12% seeing the overall economy as being flat. It may surprise some readers that 16.7% reported marginal growth in their business.
Cash flow is a major issue for companies, especially since many do not keep large reserves on hand. About 73% are experiencing cash flows that are tight or worse. Of that number 28.3% are having problems covering their expenses and are using reserves to cover costs. Some in the industry believe the next six months will shake out companies with poor capital management or inefficient operations. This all depends on how long the slow down lasts and what you have done to prepare for it.
Here are some ideas on ways to weather the storm and be one of the companies that comes out on top.
Step 1: Focus on your balance sheet. Make sure you’re managing your cash flow well. It’s something you should be doing all the time, but it’s even more critical in a recessionary environment, because there’s just that much less cash floating around.
Step 2: Prepare a worst-case, 12-month cash flow scenario. Assume a 10% to 20% drop in revenues and identify what changes you would make and when. If necessary improve your management reporting so you can identify leading indicators for your operation.
Step 3: Diversify and launch. A recession gives you the opportunity to step back, rethink and review all sectors of your operation. Consider launching a new product or service not currently offered in your market. Also, cut out parts of your business that generally under perform and sap company resources.
Step 4: Start looking at your credit and debt. You should begin looking at increasing your line of credit — in the event you need to use it. Negotiating with a bank from a position of power and good financial resources now is a lot easier to do than trying to negotiate in an emergency situation. You may want to research your bank and find out what others are saying about its financial stability. Find out if your bank loans are affected by the mortgage crisis by checking the FDIC’s summary of deposits site. Most community banks are not impacted. Having a good relationship with a local banker can be critical, but at the same time, you don’t want to depend on a bank that could fail.
Step 5: Take advantage of tax breaks. Congress passed a number of tax incentives in the economic stimulus package and recent Wall Street bailout bill. Many of these apply to 2008 and 2009 only. If you want to take advantage of the new equipment deduction (section 179), you will need to have the product bought and in use by the end of this year.
Step 6: Review your accounts receivable. Keep a sharp eye out for someone who is into you for a lot of money. You’ve got to start calling on your customers earlier rather than later to make sure they’re going to pay you. Similarly, review your agreements with suppliers and see what you can do to negotiate better terms within reason.
Step 7: Review your company’s discretionary spending items and trim any fat. Take whatever steps you can to reduce your debt. Use technology to cut down on travel and eliminate some staff if possible. Now is the time to question how much it really costs to deliver a service or make a specific product. All too often companies are well aware of their pricing structure but not clear on which products are most profitable.
Step 8: Alert your employees to the fact that schedules may have to change as you experience feast and famine moments. They will need to be flexible.
Step 9: Review your customers. Start reviewing how a recession will impact your customers. If your customer base is involved in a slumping sector, search out alternatives. Somebody’s always making money, even in a recession. Now is not the time to cut back on your sales efforts. You will need to knock on more doors and keep your face out there in front of your customers.
Step 10: Keep up marketing. Many companies cannot afford to stop marketing, regardless of economic conditions. New products may be revenue generators if marketed properly. Determine what sets your business apart from the competition and promote this difference to both new and existing customers.
Step 11: Consider raising prices to cover raw material costs. You can often raise prices if you attribute it to rising costs and tack on the expense as a surcharge. Develop creative pricing mixes to provide more options for customers. At the same time, consider offering more benefits to justify price increases.
Step 12: Recognize that the economic slowdown may hurt employee morale. Talk with your employees and develop strategies with them to improve the company and attract new business. By giving them active roles in the process, you can stave off recession blues. Above all, be positive! A negative attitude will only make you depressed and impact your ability to lead.