Plan B

Collette McKenna Parker

February 21, 2008

Steven Kleber has been in the advertising business for 21 years. His focus had always been 100 percent geared toward the home improvement market – floors, windows, anything needed for residential building. He's an expert in his industry. It's not a surprise, then, that he sensed a change in the housing market before it was officially a bust.

That's when his contingency plans went into action. He added a public relations service and expanded the reach of his expertise to include home furnishings and fashion, not just building materials. He changed the tag line, reached out to other professionals who could spread the word about his firm – manufacturer's reps – and became involved with "green" philanthropies. And it's all worked.

"Our business has expanded," Kleber says. "People want to know what we did – we took some steps. Being flexible, connecting to a wider audience and giving," says Kleber, describing his three general ideas for when times got bumpy.

Contingency plans, says BDO Consulting Director Jack Williams, are operational plans for when the worst happens, whether external or internal. Rather than being purely reactive you should have the ability to go to a shelf of problem-solving techniques and tailor the solution to adequately solve the problem. Every business – especially small ones – should have these plans, and they should be developed well before problems present themselves.

"If you think ahead, you are able to make a more deliberate plan and you're not putting out fires at your doorstep. It's very difficult to think clearly when you're putting out fires, and it's very difficult to be objective," Williams says.

Williams is also a professor of law at Georgia State University and teaches courses on businesses in financial distress. He outlines seven components every small business owner should have in his arsenal of contingency plans, and they're not just for economic downturns. Plans are needed for events that are beyond the control of the owner – think health issues, natural disasters or a mass exodus from employees – just to get your imagination rolling. Whenever your sales decrease by 30 to 40 percent, it's time to kick in the contingency plan.

1. Liquidity – When trouble hits, you'll probably need cash. Have a plan that manages liquidity functions. Start with looking at your accounts receivables, accounts payables and your internal sources of cash. For example, have one solution that will accelerate A/R turnover. How quickly can you turn sales into cash? Are you moving inventory at the same pace as your competitors? You might have to look at ways to manage inventory more aggressively.

"When things are going great there are bigger margins of error," Williams says. "You can carry inventory longer when you're flush with cash. But when you're not, you need a plan to work A/R and inventory."

Also look at your accounts payables cycle, and talk to vendors to renegotiate terms; perhaps you can take advantage of early payment discounts. And again, negotiate these terms before trouble hits.

2. Leverage – How do you handle debt? It helps to compare your debt to competitors, which may include some Dunn & Bradstreet research. If too much of your cash flow is going to paying off long-term debt, you might have to get extended terms or move some debt to equity.

3. Operations – This is the beating heart of your contingency plan. You're going to have to take a hard look at your long-term business plan and possibly come up with some variations (and, ok, if you don't have a three to five year business plan, start there). You must have the ability to look at your company through candid eyes and you need honest information about your company. This is also the time to consider hiring a consultant to help you develop an operational contingency plan, because he can provide the honesty.

Whether it is you or an outside professional, "Make sure the information pipeline is accurate, reliable and timely," says Williams, regarding pertinent sales and financial information. You must have the information channels already in place to be able to tap into timely and precise financial information. You need to know real revenue broken down by product or service line. If you have to discontinue a product or service line or shut down a store, you can do it now and not undertake a study.

"That's the strength and beauty of a contingency plan. Knowing the high profit-margin products and services is absolutely key in making timely decisions in an economic downturn," Williams says.

4. Employees – What are you doing to protect what is arguably your greatest asset? Have key man insurance in place and have a succession plan if anything catastrophic should happen to any of your employees. And most importantly, work on keeping your employees happy.

"Never, ever take good employees for granted," Williams says. "Some say cash is the lifeblood of a company, but any entrepreneur who's had his nose bloodied a little will tell you it is employees." Williams says according to psychological literature regarding employees in a new work environment, it takes above-average employees as long as 18 months to get up to 100 percent efficiency. "It should never be a short term investment on an employer's part. Create a system that makes them happy and makes it difficult for them to leave simply for money."

5. Market – What are your steps for market penetration? Your plan should include tactics for increasing market penetration and growing market solidification.

Market research helps here. And small businesses have an advantage, because the head of the company is usually pretty accessible to his customers. Take your first-tier clients to lunch and ask them where you can improve your products or customer service. Make personal phone calls to your second tier clients, and mail out surveys to your third tier.

"If you find yourself in a recession, increase market research, don't cut back," Williams says. Along with this philosophy: increase advertising. It's counterintuitive, he says, but in hard times you must increase the communications channels with potential customers, and that means advertising more.

6. Product and services – This is simply the implementation of your market research: improve your products and customer service. "One of the most important competitive advantages a small business has is its ability to connect and engage its customers more intimately and then adapt and improvise so as to add value to customer relationships," Williams says.

7. Contingency plan permutations – This is an idea borrowed from the military. The Department of Defense has a battle plan for every country and every situation. It's unlikely that we'll go to war with the UK any time soon, but there's a battle plan in place just in case. The key here is to be prepared for every scenario. Develop your financial sources well ahead of time before money is needed. In other words, "Don't wait until Tuesday to wonder where you can get money for payroll on Friday," Williams says.

And business owner Steve Kleber warns against what he calls a "barnacle" approach to business: "Whatever floats by you have to eat. There's a desire to do that in bad times," he says, referring to the desperation of trying to bring in some money. But don't. Remain committed, to your core business but be flexible and prepared to implement plan B.

It might just be the opportunity you've been waiting for.

© Photographer: James Steidl | Agency: Dreamstime.com

Related Articles:

Five Key Lease Negotiation Points Every Tenant Should Know
Here are the top things you need to know when your lease is up.
Going Global
In 2001, Servigistics was a nice little Atlanta high-tech company with revenues of $2 million. Since 2001, they've had 60 percent growth, year after year.
Tug of War
How to succeed in family business succession

Plan B

Email to a Friend

Collette McKenna Parker

February 21, 2008