Business Owners – Business Failure (or Success) During a Recession is Not Due to the Economy

Are you a business owner struggling with your business and blaming it on the economy? It’s not the fault of the economy.

Business success or failure is due to the owner’s decision making process, not the economy. Why?

As a business coach I get to see what’s happening in a lot of businesses, and I see that, frequently business owners, who have been making poor decisions during a good economy, just make worse decisions during a bad economy. In fact, the outcome, good or bad, just gets multiplied.

The belief that the economy will cause pain usually results in the fact that it does, not because of the economy but because of the decisions that were made because of the expectation that things are going to get tough. The already bad decision making, is just amplified by the owner himself as he “expects” worse things to happen.

Here are just a few of the poor decisions.

Most people believe that they have to live within a budget, and the way to do that is to cut costs to the bone.

Business decisions based on “cutting costs” usually cut critically needed things instead of looking on the RIGHT things to spend on that would increase the income and profits at this critical time.

For instance, I ask my coaching clients a series of questions that almost always get answered wrong.

What would you do the first time that your sales doesn’t pay your overhead expenses?

For a small business the usual way of dealing with this means that you “pay the overhead” and take the difference out of your pocket, or you just “don’t pay the overhead” and fear that the landlord will be knocking. The next steps that are usually taken are to reduce spending on things like marketing (while justifying that action with a statement, “it didn’t really work that well anyway.”)

However, the RIGHT answer was to identify what was the biggest return for which type of marketing, and how to increase the results of that marketing. Of course that question should have been asked before you were in this situation, but now that you are it MUST be answered NOW, and not where can you cut. Cutting typically takes out just a few dollars, while finding what marketing and other items to invest in usually can make 10′s, or 100′s of times increase. Get the point?

Actually, doing this before you are in this economy would have meant that you wouldn’t be struggling now, but, since you are, we stil must deal with it right now.

Always consider that your business is a MULTIPLIER and not an EXPENSE that needs to be fed.

I’m not saying that there aren’t businesses that are sponges, absorbing money out of your pocket, there are. But, as I’ve worked with lots of businesses, I usually see business owners with businesses that have a nice multiplying effect make the same false assumptions that they have to cut back and stop spending on the multipliers, causing a loss of 10 times what they saved.

Let’s take a look at a decision that most business owners make about the economy.

One of my clients is a small manufacturing company, does about $200K in sales a year, but rarely had a significant profit at the end of the year even in a good economy. But, as the economy started sliding they went from just barely able to pay the bills to not being able to pay the bills.

The next steps they took were to

  1. Reduce marketing efforts
  2. Lay off employees

The two worst WRONG things to do.

Frequently business owners make decisions based on THE BOTTOM line, not realizing where the multipliers are in the business. So instead of doing what would increase the income, they start cutting out things, thinking that they will remove enough to at least break even.

So, when the bottom line is zero or negative, they started looking for places to cut instead of places to increase the bottom line. When I started talking about profit margins and got blank stares I could tell they didn’t get it. After a little reviewing, we finally came to the conclusion that they made 60% on every dollar sold, which is a more than respectable profit margin. So they were baffled as to why they were losing money.

They sold $200K a year, and made $120K (60%) in profit. When we dug even deeper, it was obvious. They had an overhead of $120K, which ate up their whole yearly profit. Now when the economy started sliding their sales dropped below $200K to about $190K which wasn’t really that bad of a drop, but now there isn’t enough to pay the overhead.

So, their next decision was not only cutting out expenses, it was literally cutting the throat of he business.

I’ve discovered, with all of the businesses I’ve worked with, that this seems to be a normal thought process among most businesses. “Where do I cut?” is one of those “shoot yourself in the foot” decisions that is rampant among small business owners. It’s something we were taught to do as kids. Living within a budget meant that we had to stop spending, not finding ways to generate more.

As we went looked at this business, it was obvious that they made 20 times what they invested in marketing as sales. They are a very profitable business when you look at it this way. So, cutting $1 out of marketing would remove $20 from the bottom line. Not a good decision, but a very typical one.

Of course, another decision usually made shortly after this one is, “Who do we let go?” Just keep in mind that employees are the ones who deliver the product that’s sold for 20 times what you invest in marketing. Employees also have a multiplying effect on your business, or they should be anyway. So, cutting them could have a similar impact.

With a 20 times multiplier from marketing to sales, what do you THINK you should have done?

Increase marketing of course? Put money where your results are.

If you looked into who survived the Great Depression in the 30′s, who do you think survived? Those cutting back, or those spending more on marketing?

Of course, you MUST know what marketing is working and what the multipliers are so that you can invest in the right ones.