3 strategies to recession-proof your business
In recent months, there’s been a wave of longtime motorcoach businesses closing their doors for reasons ranging from too much debt to a lack of qualified drivers.
The trend has some wondering if the rash of closures is telltale sign of an economic downturn or owner fatigue from working in a highly regulated, competitive industry. In addition, some economists have in recent months predicted the U.S. economy is due for a slowdown. The current bull market, which started in early 2009, is the longest period of expansion on record since World War II.
One potential early warning sign of a recession is the inversion of the three- and five-year bond markets in December, which means the return on the shorter bonds is better than the longer ones. This same scenario happened before recessions in 1990, 2001 and 2007. If that is the case, the silver lining is that companies have time to get ready.
Reducing costs is the best way to recession-proof your business. Here are some ways to do that, according to Jim McCann, a consultant with Spader Business Management in Sioux Falls, South Dakota, and leader of the upcoming UMA Sales Summit.
He suggests focusing on three major areas:
Debt to Equity.
Getting debt to equity ratio to a reasonable line is an important one. He recommends a ratio of debt to equity of 2:1 or 3:1.
“Once you get over that 4:1, we tend to be managing cash more than we’re making decisions about our business,” McCann said.
One of the best ways to reduce debt is with good cash-flow management. How an owner takes money out of the business can impact the debt-equity, too. It’s important to be strategic about all the things that help manage the balance sheet.
Make sure there is consistent profitability, whether sales and expenses go up or down. McCann recommends for operating net income to be in the 10-15 percent range.
“I think the consistency for high performance is a consistent look at the profitability no matter what’s happening and deciding to make adjustments and reduce the expense side to get that profitability,” McCann said.
High personnel performance means 80-85 percent of employees are consistently delivering the expected results or exceeding the expected results. So how do you bring out the best in employees? Building a great culture is a three-step process.
First, start with good work direction. People have to understand their job expectations. Second, he says, you coach them. Meet with them on a regular basis to help them understand if they—and the company—are meeting goals. Third, an evaluation is essential. The performance evaluation is the end result of a year’s long worth of communication and talking about the objectives.
How often evaluations are needed depends on the employee. Highly motivated, highly capable employees may need more support than coaching. He recommends using measurable objectives and a dashboard or reporting system that lets employees know how they are doing.
“For someone who isn’t quite where we want them to be, then we have to sit down and talk about goals,” he said. “It’s a coaching conversation, it’s not a reprimand. It’s something along the lines of, here are our goals because if we don’t do something different, we’re not going to make them. What can we do?”
McCann declines to speculate whether an economic downturn is around the corner. But he encourages his clients to prepare strategically for the future—whatever it may hold.
“While we’re in good times, we should take note of making a healthy company so that when that downturn hits, whenever that might be, we can survive that.”
Lessons learned from the Great Recession
“It was extremely hard because a lot of my work at the time was government contracts and the recession hit government agencies quicker than most businesses. When they cut back, it affected all levels of travel and transportation. My revenues went down by nearly 25 percent for about 18 months. It taught me the importance of a diversified customer base. Now, I market differently and try to reach a range of groups, not just one sector.”
Marcia Milton, owner of First Priority Trailways, Forestville, Maryland
“With the effect of the auto industry, we really felt the recession in Michigan probably more so than any other state. To weather the economic downturn, we worked with our partners (school groups, universities and tour operators) to create value together. This included working to schedule tours on mutually beneficial dates, share in industry discounts and vendor programs and entered into long-term contracts that provided stability for both parties. By focusing on our longtime customers, we built relationships. These relationships helped us weather the recession and recover.”
Patrick Dean, vice president of Dean Trailways, Lansing, Michigan
“When we started the company, we were always shooting for owning 50 percent of the fleet outright. One of the things that became really clear to us is the amount of debt that you’re carrying into a recession is directly related to your ability to succeed. In 2008, our revenue growth was in the single-digits but we had debt on only 30 percent of our buses. We looked around the country and found many people going out of business. It seemed that the root cause was their expenses were too high when their revenue took a dive.”
Gladys Gillis, owner and CEO of Starline Luxury Coaches, Seattle, Washington