The middle of an economic downturn is not the time for businesses to start thinking about survival. With some forethought and planning, they can position themselves to stay in good shape.
It is fundamental to be in strong financial health headed into risky times, said Janet Harte, director of the Washington State University Small Business Development Center in Southwest Washington.
This ensures that taxes, employees and bills are paid and that if owners have to borrow money to ride out the slump, they can. A business can’t survive without cash, she said.
Now is also the time to work with industry associations to gauge the big picture and get a better idea of where their market is headed.
While businesses across the board are susceptible to economic shifts, manufacturers are particularly vulnerable to their supplier chain.
If the suppliers aren’t in good financial health, manufacturers could be at risk. Warning signs include orders that are taking longer than usual to fill or that arrive incomplete, Harte said.
To mitigate this risk, manufacturers should look into backup suppliers and ways to substitute or diversify their products.
From a risk management standpoint, having all your eggs in one basket is dangerous – making diversity imperative, said Steve Rosvold, owner of KRM Business Solutions and facilitator of the Southwest Washington Executive Manufacturers Forum.
Manufacturers can diversify geographically, by industry or by shifting the application of their product.
“The thing any company needs is to be able to offer is value to a customer,” Harte said. Knowing what value means to those customers is key. As is knowing your customers.
“In a recession, a customer with bad credit can bring you down,” Rosvold said. “Do business with growing, well-managed, well-capitalized customers with desirable products and services.”
Rosvold said about half of the 15 companies represented in the Southwest Washington Executive Manufacturers Forum have seen their growth level fall as of late.
“From 2004 to mid-2006, they all were going gangbusters,” he said. “It’s leveled now. It’s not hurt them tremendously, but it is affecting them.”
Cutting costs
Ways to cut costs include maintaining a flexible workforce, matching variable cost commitments with sales commitments and keeping fixed costs low.
Harte recommended pulling back on extending credit, setting up new credit practices and controlling waste.
“You want a productive line where you’re not wasting labor or materials,” Harte said. “It’s a fine, fine balance.”
During a recession, some companies rely on temporary labor, which is easy to let go or integrate into permanent positions.
When companies suspect difficult times are ahead, they may consider letting natural attrition take place, said Schwabe Williamson and Wyatt Associate Carol Catherine McCaulley, who specializes in labor and employment law.
Rather than fill positions vacated by normal employee turnover, companies can consider whether those positions are vital and may leave them vacant.
Harte pointed to a growing labor pool of 50- to 60-year-old retirees who may be looking to work part-time and who bring tremendous experience.
But before this is necessary, businesses can track customer behavior to judge their product’s demand.
“You can make better predictions if you know what customers are doing now,” Harte said. “Track what advertising works, what they’re buying and not buying and what the price sensitivity is. You’ve really got to understand your customers.”
Staffing solutions
In the end, employee layoffs may be necessary. This is a sensitive situation that employers must be prepared for, and one that could put them at risk for costly litigation.
Let-go employees may be desperate, and that may mean filing claims against a former employer, McCaulley said.
Employers should have a system in place for choosing who stays and who goes, and criteria used for selection cannot be viewed as discriminatory.
“What employers want to do is keep the employees they perceive as being the best, most productive and get rid of those who are not,” McCaulley said.
But sometimes, a supervisor’s opinion of the lower performers may be affected by absences related to workers’ compensation claims, family medical leave, military leave or disability.
“The more subjective the criteria, the more potential there is for discrimination claims,” she said.
One of the safer measures is seniority. But, she warns, employers need to be certain there wasn’t a previous pattern of discrimination that allowed upward mobility of certain groups.
“Having some kind of stated policy about how you do downsizing can help,” McCaulley said. “The dilemma is then you have to live with it.”
Giving employees information can have a downside. If they get wind of a potential layoff, the best employees tend to start looking for other work and leave first, leaving employers with poor performers.
If financially possible, severance packages with a release of claims written in can help, allowing employers to go ahead with their business without worrying about claims and giving employees a financial buffer – and perhaps better feeling of goodwill, McCaulley said.
“Carefully evaluate this process, otherwise it could end up costing more than was ever saved during downsizing,” she added.
Megan Patrick can be reached at mpatrick@vbjusa.com.
