McCombs TODAY

By Rob Adams

The Chinese might have been prescient about the current world situation when they coined the phrase “may you live in interesting times.” However, most entrepreneurs and business owners are finding these times a little too interesting for comfort, and they are looking for insight on how to manage their businesses through the choppy economic waters ahead.

How can businesses survive this economic downturn? As in all complex situations, there are no easy answers. Yet this isn’t the time to look for complex solutions. In fact, my advice is to get back to basics and trust your business instincts.

If you are a business owner, your primary focus should be on cash flow. This is something businesses should be doing all the time, but now it is more important than ever.

How? First of all, keep in mind that profitability and cash flow are not synonymous. Be ready to forgo some profitability in an effort to increase cash flow. Reduce your inventory and work-in-process to free up cash. Go to your suppliers and negotiate deeper discounts in exchange for exclusivity or longer term commitments, and turn around and offer your customers deeper discounts based on the same types of commitments. Provide discounts to any customer who pays early. Learn from Dell’s business model: collect payments early, assemble and ship your product, then pay your suppliers later.

Meanwhile, brace for lower revenues, especially if your business relies on consumer discretionary spending on items such as vacations and non-essential goods and services. Consumer spending at chains like the Gap, Best Buy and Home Depot will also see a downturn. Retailers that combine consumer staples and discount retailing, such as Wal-Mart, should do well. Health care, education and government spending will continue to be reliable.

Expect college applications to increase as people seek safe harbor from the storm. Plan on more government spending to stimulate the economy—and from this, plan on inflation.

Further cut back on expenses by holding back enhanced features for your product or service from the market. Stick with what you have now. In times like these, customers will gladly take the old price with the current features. Not only does this keep your prices stable, you may be able to offer further discounts. Scrub your budget from the bottom up to eliminate expenses not directly related to revenue generation. Take a page from a company I worked with that survived the dotcom bust: They outsourced their entire product development process for a percentage of future revenues, eliminating their up-front cash outlay and matching payment to correspond with revenue.

With less access to business credit, expect reduced capital purchases. However, this also means businesses will increase spending on parts and services to extend the useful life of their existing capital investments.

After scrubbing expenses and bracing for reduced spending, focus on generating revenue. Is cash flow best generated by keeping those expense cuts in the company or spending more on customer acquisition? Answer the question “How much incremental revenue can I generate from another dollar of sales or marketing budget?” Can you acquire more customers with some of the product strategies previously discussed? Are your competitors letting go of seasoned sales or marketing talent that you can hire? Aggressive companies with resources will go out and acquire newly available, experienced sales people, train them and reap the rewards of more feet on the street as the economy recovers. This could be you.

So what does this all come down to? Something savvy business owners already know—focus on your customers, manage cash flow and trust your instincts. In the coming quarters, count on some business Darwinism. If you aren’t showing your customers some love, you can be sure your competitors are.

As far as government help goes, “Helicopter” Ben Bernanke, chairman of the Federal Reserve, got his nickname for his willingness to “helicopter drop” money into the economy. Unfortunately, the chances of standing where that money falls are pretty slim. Listen to the experts, trust your instincts and form your own opinions— the only person to rely on is you.

Rob Adams is the director of Moot Corp and on the faculty of the McCombs School Management Department.

This is an excerpt from the article “Chaos Theory,” which originally appeared in the Fall/Winter 2008 issue of Texas, the McCombs School of Business magazine. Read the first part in the series, David Spence’s “The Strange Politics of the Financial Bailout,” here and read the second part, Lisa Koonce’s “Fair-Value Accounting,” here.