Survival Of The Fittest. How Creative Managers Can Weather The COVID Crisis and Build Stronger Companies

When the economy takes a downturn, the reflex is to stop spending, slash budgets, and cut staff across the board—and with good reason—to survive a recession, a business owner must be obsessed with cash flow. But the trick is cutting the fat without cutting the heart out of your business, and that takes strategic thinking. It's not just how to save money, but also how to save money and make your company valuable to customers who’s needs and conditions have changed.

We can help you achieve the flexibility needed to build a stronger company, built to last in uncertain times, with recruiting, staffing, and employer of record services.

My story from 3 decades ago has become relevant again today to entrepeneurs facing the COVID crisis. In 1990, when the Gulf War recession struck, my company, Jacob Siegel Company, a men's tailored outerwear maker in Philadelphia, found itself in a bind. Revenues were down by 60%, the company was losing money, and our bank wanted to cut off financing. We had to slash expenses, but instead of just cutting back on pencils and paper clips, we decided to experiment with some emergency soul-searching. We knew if we had a future, it would have to look very different than our past.

First, we had to keep breathing. Thanks to a banker who had faith and ignored the skeptics on his loan committee, I managed to restore our asset-based loan commitment, which allowed us the freedom to move forward and get creative. So after aggressively reducing inventory by any means possible, we tackled the deeper problems that afflicted our business before the recession and threatened to ruin it during the downturn. In general, by 1990, fewer people were buying the finely tailored traditional long coats that had previously been our core product. We had to change our business model. Although we kept our core product in production, Jacob Siegel Company decided to extend our product line to give clients like Saks, Brooks Brothers, Nordstrom, and other upper-end men's retailers what their customers were buying instead of what we had been previously selling--affordable outerwear and sports coats.

To cut costs, we began to outsource production overseas and we forged a strategic alliance with another local clothing manufacturer who was 4 times larger and had an all year round business, as opposed to our seasonal operation. We constructed an arrangement that made their back office a profit center and we combined administrative operations such as data processing, accounting, customer service, etc. The goal for us was to cut our fixed overhead so we could be profitable no matter how sales fluctuated. The strategy worked. Within 1 season Jacob Siegel Company broke even. We became a profitable company within 2 years. Within 5 years, our sales were larger than our host, and 11 years later our annual revenues were 10 times larger than the recession nadir. Rather than being married to an outdated business model, we adjusted to accommodate our long-time clients' needs, allowing them to increase the value to their customers. We also developed sourcing knowledge that allowed us to expand our markets across multiple distribution channels from high-end specialty stores to national department stores and discounters who needed lower-priced merchandise.

So how can your small company manage its cash when economic storm clouds gather?

Here are some survival lessons from small business owners who have made it through economic downturns in the past:

Lesson No. 1: Maximize cash flow. Nothing prepared the founder and chief executive of a 17-year-old distributor of electronics parts for the 1990 recession. Suddenly there was just no business. Determined to avoid layoffs but unable to meet payroll for his half-dozen employees, he started taking cash advances on his eight different credit cards.

Managing cash flow became a preoccupation. The entrepreneur did everything from reducing employee medical benefits to re-using cardboard boxes. Capital spending--a new phone system, for instance--was halted. Any needed office furniture acquired was for a pittance at other firms' going-out-of-business sales.

To get more timely payments from customers, he became innovative. Because it took banks five business days to clear out-of-state checks, he opened a checking account in Texas, where one of his largest customers was based so that deposits could clear in two days. He offered customers a stunning 25% discount for paying cash on delivery and when FedEx promised to get the customers' money back to him by delivering faster, he switched from UPS. This is a good example of bootstrap management. He understood that all resources are scarce and that cash must be cherished.

But all the while, even as it seemed like the business was struggling just to stay afloat, this entrepreneur never lost sight of growth. He chose to increase inventories of some things during the downturn. Many firms with lower revenue tend to go to vendors that could deliver immediately from stock on hand. He worked hard to fill every order and was often creative working with his struggling customers. When customers couldn't pay in cash, he would stretch payment terms, use partial payments with some cash on delivery while offering customers staggered payment options, and he even bartered for things of value to his business.

In time, the company employed 65, including every member of the hardy band who nursed the company through hard times ten years ago. Annual sales fell to $2 million; 10 years later the figure was $32 million.

Lesson No. 2: Keep your finger on the pulse of performance. Things were bubbling along nicely at a chain of quick-lube shops when the 1990 recession hit. The downturn hurt so much that at one point the company had $2 million in losses and only enough cash to make one more payroll. This entrepreneur reflected that the hard times transformed the company into the more successful business it became. Nine years later, the company grew to a profitable $40 million a year in sales. "You get complacent when things are going well," the entrepreneur says. "You start spending foolishly. You don't have your eye on the ball." The recession neatly drained away such behavior.

To help stop the financial hemorrhaging, the entrepreneur began using technology to monitor the performance of each of the company's 39 outlets, which collectively serviced 700,000 vehicles a year. He invested a substantial sum in developing a computerized network that ran proprietary Web-based data-mining software. The home office could then get real-time information about each outlet's sales and the extent to which customers were buying profitable additional services beyond oil changes. It enabled the analytical owner to keep a more timely analysis of which stores were doing outstandingly well or poorly. After pinpointing the laggards, he gave store managers tips on how to get their operations up to speed. If they were unable to, a new manager was brought in or the outlet was closed down. Within a year, the company shuttered four stores and was able to post a $2 million profit. Within ten years, the company made 10% of its net income by licensing the software to other firms.

Lesson No. 3: When your income well runs dry, dig another well---fast. The experience of a cleaning and maintenance systems provider shows how important it is not only to stop red ink from flowing but also, if necessary, to look elsewhere for new revenue sources when old ones wither and die. In 1990, when the recession hit, this company was a provider of cleaning and maintenance services to aerospace firms such as Grumman and Aerospace Industries. Business was drying up fast. Worse yet, the company's biggest customer went bust, owing $250,000 at a time representing more than 5% of the company's revenue. And then their bank canceled its credit line. "We tried every trick in the book to increase cash flow," said the founding entrepreneur, including offering prompt-payment discounts of 2% to customers and partnering with vendors to allow 60-days (or more) payments instead of the usual 30.

It became clear to the founder that stronger measures were required, and so the entrepreneur moved to diversify his customer base. Recognizing that when times are tough people shop at discount stores, he decided to take the company in that direction while keeping to its core janitorial business. He quickly landed service contracts worth $750,000 with a diverse group of customers. He pursued government contracts; this wouldn't be hugely profitable, he knew, but government checks don't bounce, and it was a way to keep the business going at a time when money was so tight that Bertuglia often couldn't even pay himself. The company managed to land a few big fish in the government arena. As an example of the lasting benefits that can come of hard times, such government work represents a significant percentage of the firm's business.

Within ten years of the 1990 recession, this company had 2,400 employees and annual revenues of $60 million.

Companies that want to survive in turbulent times must set a dual course in managing cash flow. First, it must crack down hard on costs without damaging the core of the business. Second, it must find new and creative ways to boost cash flow. Don't hesitate to ask customers and vendors to partner in your efforts and then reward their loyalty.

Please do your best to build a model that provides the flexibility to be ready for anything that happens in the next few years. Good luck & good creativity!