(Ed note: I’m taking the liberty of reposting this here, from where it originally appeared on entrepreneur.com, for the convenience of our BIG blog readers, since I wrote it. Tim.)
I’m a baby boomer, born in 1948. I’ve seen recessions before. I was job hunting during the recession of 1971. My wife and I were deeply in debt and trying to buy a house during the recession of 1982. We sold a house in California and moved to Oregon during the recession of 1992. We had to lay people off–five of 35–during the recession of 2001. And this recession seems like the worst I’ve seen.
So it’s time to go back to fundamentals. That doesn’t necessarily mean cutting costs, dropping products or selling off inventory. And it definitely doesn’t have to mean cutting people.
The first fundamental is your planning, which essentially means watching things more closely. Track your progress on cash, sales, expenses, new projects, customer satisfaction, internet traffic, ad spending–all of it. And track it more closely.
Look for built-in indicators. It’s your business; you know what they are. Think about what drives your sales–or expenses–and how you can get early warning about changes that might affect you. For some, it’s as simple as street traffic or floor traffic. For others it’s internet traffic or e-mail response rates or deal flow or lead generation. Don’t wait for the results to play all the way through your system–look for them early.
One of the first things to do when things get tough is tighten the planning and shorten the planning cycle. Review your progress more often than usual. Think of it as zooming in on the detail–look at things by week instead of by month or by month instead of by quarter.
If ever there were a time for careful planning, it’s now. It brings me back to one of my favorite quotes from Dwight D. Eisenhower: “The plan is useless; but planning is essential.”
2. Watch Cash Flow Drivers
The second fundamental is watching the drivers of cash flow. Keep a very close eye on burn rate vs. revenues. Burn rate, in this context, is a lot like fixed costs, but more. Fixed costs are what you’d pay even if your business closed down. Burn rate is what you pay regularly every month to keep your business running, but without the variable costs of sales or direct costs. That includes probably all of your salaries (unless you have some assembly labor or part-time labor that goes up when sales go up and down when sales go down), your rent, your ongoing marketing expenses, your office expenses and all the rest. If your revenue goes down, you can maintain your burn rate for a while, sacrificing profits; but you can’t let revenues stay under the burn rate for very long without losing capital and, if the problem continues, going under.
I know you know that, but I put it here because the vocabulary helps. Revenue vs. burn rate: keep the revenue higher than the burn. And don’t forget that if you’ve got business-to-business sales, business customers are likely to take longer than usual to pay. That involves factoring in collection days–the measure of how fast customers pay what they owe you. If the collection days increase, cash decreases.
The third fundamental is people. Don’t make the mistake of laying people off too soon. No matter how carefully you follow your plan, layoffs might be necessary. But don’t be too quick because the recession will end. Good employees are hard to find–especially trained people who know your business.
President and Founder
Palo Alto Software