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Small businesses can take steps to withstand downturn

Sharon Caskey Hayes • Mar 8, 2008 at 12:00 AM

KINGSPORT — Randy Scott moved his small business here about six months ago from Ohio, and so far, he hasn’t felt the impact from the nation’s economic downturn.

At least not yet.

Scott owns Finishing Touch, a metal restoration company on Cumberland Street in downtown Kingsport. The business restores automobiles, boats, antiques, and more.

“I can’t say that business has really slowed down. But right now, our market is the individual guy who’s working on the car in the garage. Do I believe that this economy is going to catch up with that — most certainly. Because let’s face it, $3, $4, $5 a gallon for gas — the first thing that’s going to go on the chopping block is that car in the garage,” Scott said.

Small business owners across the nation are bracing themselves to weather the brewing economic storm.

While most small businesses can’t completely insulate themselves from the slowing economy, they can take steps to help soften the blow.

Aundrea Wilcox, director of the Kingsport Office of Small Business Development & Entrepreneurship (KOSBE), said one of the biggest mistakes small businesses make is to cut their advertising and marketing budgets during hard times. While eliminating or significantly decreasing marketing efforts can save money in the short term, such actions can prove fatal over the long haul, Wilcox said.

“Small businesses should expect marketing return on investment later rather than sooner,” Wilcox said. “A good marketer will measure the effectiveness of every marketing effort, and every effort will be research-based — driven by what customers need. They will keep doing what works and stop doing what doesn’t work.”

She said that many small businesses become impatient with the lack of early visible results and quit advertising and marketing too soon.

“They should be reminded that advertising and marketing actually generates future revenue streams by increasing brand awareness and market share. It’s OK to trim back some spending in this area temporarily, but do not cut out all advertising and marketing as a cost reduction measure of the day — the companies that do will pay dearly later with a decrease in market share and profitability. The small businesses that continue to advertise and take advantage of the downturn season will actually increase their market share at the expense of small businesses with low or zero marketing participation,” Wilcox said.

She said small businesses should set aside a minimum of 2 to 3 percent of their sales for advertising and marketing. And startup companies may need to budget as much as 10 to 11 percent of sales for marketing in the first two years of operation.

“The more they spend on advertising and marketing, the more they will increase awareness for their product or service, which is crucial for a startup,” Wilcox said.

She said KOSBE can help small businesses develop a budget that makes sense based on specific industry benchmarks.

The Service Corps of Retired Executives (SCORE) also offers tips to help small businesses weather economic downturns. First, SCORE suggests consulting your bank about your company’s financial status.

“Lenders have valuable experience with economic cycles, and they can advise you on issues specific to your business and industry,” according to SCORE.

By consulting your bank, you can also help to arrange a line of credit. Even if you don’t need the money now, you would have a ready source of credit in place if cash flow becomes a problem.

SCORE also recommends solidifying relations with creditors. Some businesses may have to renegotiate terms, and “any flexibility will hinge on whether they perceive you as a reliable partner, or as a risk.”

SCORE suggests keeping a close watch on receivables, and following up with anyone who owes your business money.

“Be firm when dealing with problem accounts, but also be willing to negotiate when appropriate. It may take only a matter of months for a struggling customer to become a stable source of income,” according to SCORE.

The organization also recommends reviewing your operations and expenses more frequently, and reviewing your business plan more often.

SCORE recommends stepping up marketing efforts to reassure current customers and to reach new markets.

SCORE suggests maintaining good relationships with customers, and make sure it’s easy for customers to contact you. Businesses should develop a Web site and dedicate part of it specifically to customer needs. SCORE also recommends creating a survey and asking customers how you can better serve them.

And SCORE suggests building a support team, such as an advisory group with representatives from inside and outside your business.

SCORE offers help through its Web site at www.score.org.

The Tennessee Small Business Development Center is also available to help, as is the Holston Business Development Center.

Chip Bailey serves as director of the Holston Business Development Center in Kingsport and is the local representative for the Tennessee Small Business Development Center.

Bailey said January and February are historically slow months for many businesses, especially small businesses. But this year was particularly hard on some companies, and gloomy economic reports on the national news have not helped, Bailey said.

During such downturns, people who’ve been thinking about starting their own business actually are more likely to take action to turn that dream into reality, Bailey said.

He said his classes and workshops to help would-be entrepreneurs start their own ventures have been attracting more folks this year than last year. He said some people are seeing cutbacks at the companies where they work, and fear layoffs could be on the way.

“Everybody’s got a business idea. And it seems when things turn a little bit down, and they start feeling the pinch at work, then they start saying what is it going to take to move this idea forward,” Bailey said.

He said some folks know what kind of business they want to start, while others don’t.

Bailey said he tells people in his classes and workshops to stay away from trends they may see on television, such as flipping houses for profit.

“That’s the wrong way to go,” he said.

“I tell them to look at two ways — one is toward the aging demographics, and the other is anything green,” Bailey said.

He said businesses designed to respond to the needs and wants of aging baby boomers are a good way to go. And businesses that focus on earth-friendly products and services are a good bet, he said.

“That’s the two areas I tell people to think about,” Bailey said.

He said would-be entrepreneurs should make sure they have sufficient capital to start their new venture. Banks typically want folks to put down 20 percent of their own funds to start a business, he said.

“And by all means, don’t start your business with credit cards. That’s a big mistake,” Bailey said.

“Cash flow is the biggest thing that kills a small business,” he said.

Bailey said small business owners should keep their personal credit cards separate from their business debt. And watch out for credit cards designed for small businesses. “I think that can get you in trouble in a hurry,” he said.

Bailey said 80 percent of small businesses in Tennessee don’t make it past year one, “and it’s mainly because of bad money management.”

“It’s not so much the fact that they don’t have the skills to do the business, but they don’t watch the cash flow. Make sure that there’s more coming in than going out. Avoid a cash drain,” Bailey said.

He said the future of America rests on the shoulders of small business, particularly as more and more manufacturers move offshore.

“I think small business is the way to succeed — to offer products and services that people really need. People just need to plunge right ahead,” Bailey said. “And don’t stop because we might have a recession. Let’s move forward.”

For more information, contact Wilcox at KOSBE at awilcox@KOSBE.org or (423) 392-8801. Or contact Bailey at the Holston Business Development Center at cbailey@mail.tsbdc.org or (423) 578-6235, or visit on the Internet at www.holstonbusinesscenter.com.

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