Recession Update from Main Street

I have been waiting with some angst for the November NFIB survey of small business owners.  The results were released this morning.  Overall, these entrepreneurs are not optimistic about the near future, as indicated by the Index of Small Business Optimism which recorded the fourth lowest reading in the 35-year history of the survey. 

So what do the specific items tell us? 

While this is a significant recession, at this point it does not appear to be as bad as the two other major downturns of the past half century.

Employment

 

The reduction in work forces in these small businesses seems to have taken a pause.  The decline in average employment per firm dropped slightly in November, but was not nearly as bad as September and October.  43% of those surveyed hired or tried to hire. This seems remarkably high when compared to the corporate sector, where the news is about hiring freezes and layoffs.  Interestingly, even with the increase in overall unemployment in the US, finding the right people is still a problem.  72% of those trying to hire reported few or no qualified applicants for the job openings they were trying to fill. 

The outlook for employment in small business suggests that we have not hit bottom in this recession.  Over the next three months, only 6% plan to create new jobs, and 17% plan workforce reductions.  This yields a seasonally adjusted net-negative 4% of owners planning to create new jobs, one of the lowest readings in survey history. 

While this is not good news, these findings are not as low as occurred in the 1974-75 or the 1980-82 recession periods. 

Capital Spending

The frequency of reported capital outlays over the past six months rose two points to 56% of all firms, still at recession levels, but still not as bad as we saw in the 1974-1975 downturn. These entrepreneurs are spending a little more on new equipment and new fixtures and furniture.  They are spending a little less on new automobiles.   

Overall, spending is weak, but the frequency of outlays has improved for the last two months and there is a slight increase in planned capital spending over the next few months.

Inventories and Sales

Small business owners continued to reduce inventory levels to adjust to slower sales. 

Earnings  

The net percent of owners reporting higher profits deteriorated further in November.  Seasonally adjusted, those reporting declining earnings trends outnumbered those with gains by 38% percentage points

Profitability is the second worst showing in 35 years of survey history.

Inflation

Nothing tends to kill inflation like a recession.  Price pressures vanished in November.  However, many of the structural causes of inflation are still present, so we need to keep an eye on inflation as the economy rebounds.

Credit

As the economy weakens, loan demand from small business owners continues to decline. 

My Take

While this is a bad recession, for entrepreneurs there is no indication that it is any worse than the last two deep recessions over the past fifty years.  We survived these tough times and will survive this one.

Small business owners are approaching these tough times with a prudent hand: 

·          They are focusing on cash.

·          They are reducing debt.

·          They are tightening inventory.

·          They are being cautious about their overhead expenses.

While business failure will increase, the entrepreneurial spirit is still alive and well.  Our entrepreneurial core should keep us from falling into a deeper recession.  New venture formation will help lead us to the recovery that we can expect by early 2010.

Bootstrapping Resource

My new textbook titled Bootstrapping is now available for pre-orders.  What started out as a single chapter in our book Entrepreneurial Financial Management (second edition of this textbook is due out this spring), grew into a full book that is part of the new entrepreneurship series from Pearson/Prentice-Hall.

 

bootstrapping.jpg

 

The contents:

PART I THE ART OF BOOTSTRAPPING

Chapter 1 Introduction to Bootstrapping

Chapter 2 The Essentials of Bootstrapping

 

PART II BOOTSTRAPPING TECHNIQUES

Chapter 3 Bootstrapping Key Fixed Costs: Overhead and Capital Purchases

Chapter 4 Staffing and Human Resource Bootstrapping

Chapter 5 Bootstrapping Through Efficient Processes

Chapter 6 Bootstrap Marketing: The Start-Up Venture

Chapter 7 Bootstrap Marketing: The Growing Venture5

 

PART III MANAGING A BOOTSTRAPPED BUSINESS

Chapter 8 Start-Up Financing and Day-to-Day Cash Flow Management in a Bootstrapped Business

Chapter 9 Creating and Sustaining a Bootstrap Culture

 

Here is a blurb from the publisher:

 

With a focus on practical techniques, entrepreneurs learn how to stretch resources and thrive on lean budgets. The text focuses on bootstrapping techniques for a variety of ventures-from small, family-owned businesses to high-growth upstarts.  While this book treats the subject of securing initial financing for the start-up venture, it also fully explores how entrepreneurs manage and sustain the business as it grows.

 

Keeping a Steady Cash Flow

My column from this week’s Tennessean:

A previous column examined reasons why managing cash flow is critical in today’s tough economic times.

Remember, there are some basic steps that can be taken to help ensure that cash will continue to flow into your business in a consistent and timely manner.

The first step to bolster cash flow is to improve operating profit margins. In today’s economy improving productivity is the best strategy for improving margins.

Generally, in a small business productivity can be improved through one of two means. First, focus on improving the utilization of your physical resources. Idle equipment and space present an opportunity to improve sales without adding to fixed costs. Second, push for greater productivity from your employees; you need to find ways to get more revenues from your current staff.

It is wise to bring employees into this planning. Be honest with them that times are tough and that if productivity improves it helps to protect everyone’s jobs. They will often have the best ideas on how to improve productivity.

The second step is to make sure to target better customers to increase sales. The tendency in a down market is to chase any and all customers. But some customers are definitely better than others. Focus on customers who have been stable and reliable in their businesses. Spend marketing efforts on keeping these customers happy and loyal.

It’s cheaper to keep the customers you have than to chase wildly after new ones. Also, when you pursue new customers go after those who will give you higher profit margins.

The third step is to cut overhead. It is your enemy more than ever before. By lowering your overhead it lowers your break-even point, which is critical if sales soften.

Cut out the extras

Look long and hard at every non-operating and non-revenue generating expense. Agonize over any addition to overhead such as more space or more administrative staff. Get back to your bootstrapping roots.

Finally, your customers are also feeling the impact of these tough times so their buying behaviors will change. If you offer credit to your customers, it is important to keep a close eye on accounts receivable. Stay on top of it; don’t wait too long to take action if a customer is slowing down payments.

You may have to put more pressure on them to get paid on a timely basis. Even good customers who get behind on payments should be put on a cash basis for future sales. As much as you might want to help them out, you are not a bank.

How to develop a clear plan for your cash once it starts to build will be the topic of my next column in this series.

The Spirit is Alive and Well

This week’s job reports are indeed chilling.  This really is beginning to remind me of the late 1970s into the mid 1980s when we experienced a long period of mostly down economic times.  Small business had been our one bright spot in job creation, but with this week’s ADP Small Business Report found that small businesses lost 79,000 jobs in November, the largest decline in more than seven years.

 

Although our cup no longer runneth over with economic growth, I do firmly believe that the glass is still half full.

 

 

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I see the energy in young entrepreneurs in the classroom.  I saw amazing creativity this week at the Bloblive Nashville event we hosted at Belmont.  I see the determination of the entrepreneurs in groups like EO (Entrepreneur Organization) who are sending 75 people to Belmont today to learn about how to grow and expand their ventures.  And I see the enthusiasm that comes from the continued growth in readership of this blog.  This what gives me hope for the future.

 

2009 will be a year of working to survive for some, but also a year of opportunity for many if they keep using their entrepreneurial wit and skill. 

 

Ramping Up Your Start-up

Susan Schreter at seattlepi.com offers several useful tips on how to speed up the time to positive cash flow for new start-ups, which means income for the entrepreneur. 

Her suggestions and my comments:

Specialize. Articulating at least one special area of expertise helps target and secure first customers. It works because customers prefer to select vendors that they think offer exceptional service value.  

I also like to encourage specialization because it helps you get your message out to the market more clearly and more quickly.  It also helps with word-of-mouth, as people are more likely to remember you if you are known for something specific and share that with others.  “If you need X, call ABC Company — that is what they do.”

Call rather than advertise. Advertising costs money that cash-strapped entrepreneurs just don’t have. 

Bootstrap, bootstrap, bootstrap!!  Not only does calling only cost your time, it makes a personal relationship with your customers, which in today’s market conveys “value.”

[Do] what customers love or need to have done.  I know a disheartened, long-unemployed executive who started up a window-cleaning business targeted at homes with big cathedral ceilings. The idea came to him when he looked at the dirty windows in his own home. He bought a few ladders and cleaning supplies, then cold-called within upscale neighborhoods….These days, his business employs a full team of window washers.

Very true.  Find pain in the market and create a solution to ease that pain.

Compare opportunities. Can you take home more money in a startup business than working part time at The Home Depot, Starbucks or Costco — companies that offer health insurance benefits to part-time employees? Because few entrepreneurs can accurately predict the speed of first-income generation, consider working at a part-time job while revving up a new business.

One of my favorite bootstrapping techniques is “don’t give up your day job.”  Find part-time work that complements the schedule what you are trying to start up.  For example, if your new business is a day-time operation, find an evening job. 

Changes in Immigration Policy can Spur Economic Growth

Want to give the economy an entrepreneurial shot in the arm?  Immigration may be part of the answer.

Most studies find that immigrants are more likely to be entrepreneurs or self-employed than the population as a whole.  The Philadelphia Business Journal reports on yet another study that adds more support:

About 220 businesses, employing 900 workers, occupy the six-block stretch of 52nd Street between Arch and Spruce streets in West Philadelphia.

Overwhelmingly, they are immigrant-owned, reported the Welcoming Center for New Pennsylvanians, which hopes a study released this month will bring attention to the contributions being made by immigrants to the city’s struggling commercial corridors.

Immigrants have accounted for nearly 75 percent of the area’s labor growth since 2000 and, when compared to native born, more are employed (73 percent versus 71.5 percent) and self-employed (10.7 percent versus 7.9 percent), according to a new Brookings Institution study, “Recent Immigration to Philadelphia: Regional Change in a Re-Emerging Gateway.”

Over the past several decades we have looked at immigrants as a source of cheap labor and our policy — or lack thereof — has reflected this. 

To help create jobs and growth we should open our doors to entrepreneurs from around the globe.  Current policy makes it difficult for entrepreneurs to enter the US legally.  We should be actively recruiting immigrants who want to come to our system of free enterprise to start their businesses, just as we did to bring in the scientists we needed in the 1950s and 1960s to help fight the cold war. 

The last great entrepreneurial economic boom was created in large part by first generation Americans and sustained by a large, but controlled, wave of immigration that helped to build an economy that last through most of the 1900s.

 

In addition to a “green card” for immigrants coming here to work, the US also needs another card (let’s color it a “red card” for urgent) to support the flow of legitimate entrepreneurs looking for the freedom this country offers to business owners.

Bloblive in Nashville!!

Bloblive Nashville!!

It’s time to grab the mic and bounce your fun, wild, money making, world changing idea off your fellow big thinkers.  Come share your idea and help develop someone else’s.  Join us for a bloblive session where inspiration is guaranteed.  We’ll supply the food, you just bring that big brain of yours.

This event is open to everyone — all you need to do is register for this event here

December 3, 2008 (7:00 PM – 9:00 PM)
Belmont University
Beaman Student Center, Rooms A&B (free parking is available in the Curb Center parking garage).
Nashville, Tennessee
Doors open at 7:00 PM – Idea sharing and collaboration begins at 7:30 PM

Managing by Faith

The Entrepreneurship Research and Education Network of Central European Universities (ERENET) has just published its latest issue of Profile, which examines the role of faith and beliefs in doing business from a wide array of authors from around the world.  Mike Naughton and I wrote a piece for this issue based our work together in our Good Entrepreneur Project. (You can purchase our latest book on this topic, Bringing Your Business to Life, using this link).

The TOP 9 Questions for November 2008 from the NFIB

 

Here are the Top 9 Questions from Denny Dennis at the NFIB Research Foundation (click on each question to find the results from their surveys):

 

1. CREDIT LINES – How many small business owners have one or more credit lines at a financial institution, NOT including credit cards?  (Vol. 8, Iss. 3, Q#25.)

 

2. IMMIGRATION – Do more small business owners think they benefit from expanding the number of H1B visas (for highly skilled people) than think they would be damaged by it?  (Vol. 8, Iss. 2, Q#12.)

 

3. BUSINESS FORMATION – If most current business owners got into business by starting their firms, what is the second most common form of entry?  Purchase?  Inheritance? Or, Employees brought into ownership?  (Vol. 2, Iss. 6, Q#12.)

 

4. HEALTH INSURANCE – Who shops for employee health insurance on behalf of small firms? (Vol. 7, Iss. 3, Q#3.)

 

5. INVENTORY – How many days of inventory do small business owners try to maintain on their most important items (among those whose inventory is a major expense)?  (Vol. 6, Iss. 4, Q#3a.)

  

6. HOME OFFICE – How many small employers have a home office?  (Vol. 8, Iss. 4, Q#9.)

  

7. DISASTERS – What is the biggest problem typically caused when natural disasters strike small businesses?  (Vol. 4, Iss. 5, Q#4.)

  

8. CREDIT CARDS – What portion of small business owners typically pay off credit balances at the end of every month?  (Vol. 8, Iss. 3, Q#24.)          

   

9. TECHNOLOGY – How well do small business owners think they embrace new technologies in their businesses?  (Vol. 5, Iss. 5, Q#5.) 

Happy Thanksgiving

Each year I share the original proclamation for our American Thanksgiving holiday.  Even in difficult times we have so much to be thankful for.  This is still a land of bountiful opportunities.  President Washington’s words remind us the importance of giving thanks to God for all of his blessings with a humble heart.

“Whereas it is the duty of all nations to acknowledge the providence of Almighty God, to obey His will, to be grateful for His benefits, and humbly to implore His protection and favor; and Whereas both Houses of Congress have, by their joint committee, requested me to recommend to the people of the United States a day of public thanksgiving and prayer, to be observed by acknowledging with grateful hearts the many and signal favors of Almighty God, especially by affording them an opportunity peaceably to establish a form of government for their safety and happiness:

“Now, therefore, I do recommend and assign Thursday, the 26th day of November next, to be devoted by the people of these States to the service of that great and glorious Being who is the beneficent author of all the good that was, that is, or that will be; that we may then all unite in rendering unto Him our sincere and humble thanks for His kind care and protection of the people of this country previous to their becoming a nation; for the signal and manifold mercies and the favorable interpositions of His providence in the course and conclusion of the late war; for the great degree of tranquility, union, and plenty which we have since enjoyed; for the peaceable and rational manner in which we have been enable to establish constitutions of government for our safety and happiness, and particularly the national one now lately instituted for the civil and religious liberty with which we are blessed, and the means we have of acquiring and diffusing useful knowledge; and, in general, for all the great and various favors which He has been pleased to confer upon us.

“And also that we may then unite in most humbly offering our prayers and supplications to the great Lord and Ruler of Nations and beseech Him to pardon our national and other transgressions; to enable us all, whether in public or private stations, to perform our several and relative duties properly and punctually; to render our National Government a blessing to all the people by constantly being a Government of wise, just, and constitutional laws, discreetly and faithfully executed and obeyed; to protect and guide all sovereigns and nations (especially such as have shown kindness to us), and to bless them with good governments, peace, and concord; to promote the knowledge and practice of true religion and virtue, and the increase of science among them and us; and, generally to grant unto all mankind such a degree of temporal prosperity as He alone knows to be best.

“Given under my hand, at the city of New York, the 3rd day of October, A.D. 1789.”

George Washington