For small businesses, when the going gets tough, get tough on costs

Raise your game a notch by being more efficient and marketing smarter.

By Cyndia Zwahlen
Special to The Times

March 31, 2008

Whittier Hearing Center Inc. has endured hard times before.

Eight recessions have come and gone since the hearing care company opened its doors in 1955. Even though the economy is souring again, the company's owners expect that recent investments in staff education and equipment upgrades could mean higher sales this year.

"We've been through these recessionary periods many times," said Mary Ann Gilbert, director of audiology and co-owner of the business, which offers tests, hearing aids and ear protection gear. "We survive by being very value-focused for the patients. That helps us because the patients trust us and we get increased referrals from them and the medical doctors in our community."

The 20-person company was careful to manage its money so it could invest in itself. Now its five audiologists have doctoral degrees and its equipment is on par with that of leading regional hearing centers such as the House Ear Clinic in Los Angeles, Gilbert said. The company also is working to expand its reach beyond the local community.

When times are good, too many small businesses take a lackadaisical approach. Sloppy practices may not be fatal to a small business when cash is flowing, but when times get tough, those same bad habits could open cracks that threaten the profitability or even the viability of a small company.

Is your business recession-proof? Take a look at the checklist below, and remember, the solution is no mystery: Manage your cash, court your customers and create new opportunities, just as Gilbert's company has tried to do.

"In the end, these are steps that can help in any economic situation," said Daniel Morales, director of the San Gabriel Valley Small Business Development Center. (www.SanGabrielValleySBDC.com) Unfortunately, it can take the pain of an economic downturn before many entrepreneurs are willing to make the time to work on their businesses, not just in them.

The growing squeeze is obvious. The economic confidence of small-business owners dropped sharply this month from February, with the index falling to 77.8 from 90.9, according to a survey of 1,000 small firms nationwide by Discover Financial Services. The March survey also showed that more small-business owners say they have experienced cash flow problems over the last 90 days: 47% compared with 43% in February.

Too often, small-business owners let their apprehension over a souring economy block the action they need to take to strengthen their businesses, said consultant Brandon Shamim, chairman of the Los Angeles Area Chamber of Commerce's Small Business Council.

"Our guiding principle is: Be targeted. Be disciplined. Be visible," said Shamim, who is also president of Beacon Management Group in Pasadena.

Here are tips from Morales, Shamim and the American Institute of Certified Public Accountants that could help your small business weather an economic downturn.

Operate lean

Check your balance sheet and income statement to look for places to free up cash. "Cash is king," Morales said. The more of it on hand, the more options you have as a small-business owner.

Start with a close look at your financial statements, including the balance sheet, which gives a snapshot of your company's finances. It lists assets, liabilities and equity. If you're not sure what those terms mean, ask your CPA for help. If you don't have a CPA, now may be a good time to find one.

Your income statement, which is also called a profit and loss statement, summarizes revenue and expenses. If you aren't making a profit, or if it's too slim, come up with a list of ways to lower your break-even point, the point at which your revenue exceeds your expenses. Your list will include steps to increase sales and lower costs.

Redo debt

If your company is in good health, consider increasing or signing up for a line of credit to provide future working capital. Restructure, reduce or optimize your other debt. Are you paying a high interest rate on a loan, leasing unnecessary equipment or facing a balloon payment? Renegotiate the terms.

Free advice from your local small-business development center or from SCORE (www.score.org) can get you started. To find a center near you, visit the state's online business portal at www.calbusiness.ca.gov/cedpgybsbdc.asp.

Morales is finding that credit card debt has become a big burden for many small-business owners, which card firms had targeted with easy sign-up rules. And as banks tightened credit, lots of small-business owners relied on their credit cards to fund their operations. Many are now finding that late payments can trigger punishing interest rates.

Manage inventory

Have a sale to move slow or obsolete inventory. Use the cash to pay off debt. Analyze your purchase patterns. See if you can shorten the cycle -- the time you hold the inventory.

Consider carrying fewer items and making arrangements to order more frequently. Or see if you can trade for new merchandise.

"You have to look at whether inventory is really producing or just sitting there," Morales said.

Gauging demand accurately is also important. Just because customers say they are willing to buy doesn't mean they will, he said.

Review receivables

Just like inventory, unpaid receivables can tie up cash.

Keep an eye on your biggest clients to make sure they can pay their bills on time. If you see warning signs, call them to make payment arrangements. Use a carrot-and-stick approach that offers discounts for early payments and charges interest on late payments, Morales said.

Consider using credit card payments or electronic fund transfers to make getting paid faster and easier. Also consider charging upfront for certain services or products.

"We might be getting into some interesting times. You have to think outside the box," Morales said.

Cut discretionary expenses

Ask employees for ideas on how to cut costs. Look at company cars and cellphones for savings. Consider subleasing extra space or moving into smaller quarters. Reconsider nonessential business travel. It might make more sense to lease equipment rather than buy it.

Use technology efficiently

Consider online accounting software, videoconferencing and online processes for more efficient operations.

Entertainment lawyer Lindsay Spiller, who splits his time between his San Francisco office and Los Angeles, uses an online invoicing and time-tracking service to cut costs at his 4-year-old firm while maintaining a professional image.

The Web-based service from FreshBooks in Toronto gives small-business owners and freelancers a relatively inexpensive and easy way to bill clients from anywhere, he said.

"With the click of a button I can send an invoice to my client, and they receive a very nice-looking, professional-looking invoice that makes it also easy for them to pay," Lindsay said.

Market smart

Spruced-up websites and targeted e-mail sales pitches are ways you can use technology to keep costs down and pump sales up. Spiller uses an online newsletter service from Constant Contact Inc. of Waltham, Mass.

"It's a great way to keep your business in front of your clients in a very subtle but professional way," he said.

If you can't afford a booth at a trade show, consider attending anyway and working the aisles, Shamim suggested.

Stay visible

Talk to your customers. Ask for referrals. Contact dormant customers. Ask everyone what products or services they'd like to see you add.

At Whittier Hearing Center, which Gilbert bought in 1990 with colleague Oscar Narro -- both had worked at the company since 1983 -- there are plans to boost the number of educational outreach events. These seminars and free hearing screenings don't cost much but work to educate potential clients who often turn into real ones.

The business has expanded its services to offer sophisticated hearing tests for infants as well as custom ear molds for musicians and swimmers and noise-protection devices for workers.

It's an example of the active approach that Shamim recommends, rather than simply reducing hours or services to save money in the short term.

Small businesses don't have to worry about approvals from multiple committees or management layers to make a smart move when they see an opportunity.

"Even though we are in an economic downturn," Shamim said, "you could not only survive but thrive."

Cyndia Zwhalen at The Los Angeles Times