Don't Let the Downturn Get You Down

How to keep growing during uncertain economic times

By Amy S. Choi and Jeremy Quittner

Browse Issues

Browse the BusinessWeek Archive

Related Items

• Pricing: Hold Steady
• Starting at the Bottom
• Slide Show: How to Deal with Economic Uncertainty

Story Tools

• post a comment
• e-mail this story
• print this story
• order a reprint
• digg this
• save to del.icio.us

• View Slide Show

The first inkling of trouble came late last August. Every summer, sales at Alchimie Forever of Washington, D.C., ramp up as spas and beauty salons build their holiday supply of the company's luxury face creams and lotions. But this year, orders were on pace to grow only 10%, a mere blip compared with the usual 24% third-quarter bump.

Founder Ada Polla Tray got busy. She upped the commissions of her four salespeople to 13% from 8%. She gave spa managers $100 gift cards for every $1,000 of products they sold. She offered a free tube of a new exfoliation cream to customers who bought six at $39 a pop. And she started slashing costs throughout the eight-employee, $1 million company. Her moves helped soften the blow: Sales rose 12% over the same quarter in 2006.

How quickly the good times seem to have screeched to a halt. Entrepreneurs like Polla Tray are getting a crash course in managing during tricky economic times. "The environment has gotten much more difficult for entrepreneurs," says Glenn Okun, clinical professor of management and entrepreneurship at New York University's Stern School of Business. "In the last few years, it was in their favor with lots of capital, both debt and equity, on very favorable terms, but now the pendulum has swung in the other direction."

Difficult may be an understatement. Banks have tightened their lending standards, and credit-card defaults are up. Home values continue to fall, ending many entrepreneurs' plans to use home equity lines of credit for quick cash. Energy prices are sky-high. And although the Federal Reserve slashed interest rates twice in January and an economic stimulus package is on the way, how much those changes will help small companies—and when—remains to be seen.

In the meantime, cutting costs is imperative. You'll want to cast a sharp eye on your company's spending. Not just for big-ticket items such as real estate and staffing, but for everyday needs such as office supplies and cell phones.

But there is more you can do, and some of it might surprise you. A period of economic uncertainty is exactly the time to assess both the finances and the future of your business. Indeed, companies that buckle down can do as well—even continuing to grow—as most companies do during boom years. Here's one measure: About 26% of small businesses operating during the recession of 2000 and 2001 added employees, not much less than the 29% that did during the last year of the tech bubble in 1999, according to an October, 2007, study by the Small Business Administration's Office of Advocacy. So look hard at your balance sheet and business model. Assessing your customers and your market will help you decide where to cut back and, yes, where to invest.

NO EXPENSE TOO SMALL

You may think of yourself as the visionary behind your company, but now is the time to be an eagle-eyed accountant, ready to attack the tiniest prey. In 2007, Polla Tray sent $30 bottles of champagne to customers as holiday gifts, rather than the $45 box of chocolates she gave the year before. She asked her sales staff to stay with friends and relatives when they traveled and to book flights during off-peak times. Those changes helped Alchimie slash its $20,000 annual travel budget by 15%. Says Polla Tray: "No expense is a small expense, especially in a downturn."

Don't economize indiscriminately, though. "It's important to cut items that may affect your lifestyle, but not items that affect your customers," says Matthew Kelley, CEO of financial advisory Gold Medal Waters in Boulder, Colo. If you run a coffee shop and go from three baristas to two, you may save money, but you'll lose customers who don't want to wait on a long line for their java.

It may sound counterintuitive, but lean times may call for you to boost some of your outlays. "Sales is the lifeblood of the business, and you should often consider adding to sales and marketing during economic downturns," says Steven Hauck, president of Steven Hauck & Associates, a turnaround management consulting company in Arroyo Grande, Calif. You could raise commissions, as Polla Tray did.