Startups

How can small businesses adapt in a squeezed economy?

With strategies like workflow optimization and inventory forecasting, you, too, can survive another economic downturn.

Prepare to be squeezed.

(Photo by Karolina Grabowska via Pexels)

This is a guest post by Sean Dawes, the cofounder of Modded Euros.
As they say, “When given lemons, make lemonade.” But what is a business to do when they are being squeezed in the current economy?

The US economy is facing staggering inflation and businesses are oftentimes presented with two options: Increase pricing to match rise in costs — thus pushing the impact more on the consumer — or internally decrease corporate margins to maintain market pricing for their customers. Neither of these two options are ideal during uncertain economic times.

In inflationary times, consumers are not only being squeezed for your product, but many products and services. That makes the decision to drive up your price the ultimate test of your customer base. Will they stay or will they leave? Is the value proposition of your product or service enough to sustain this sticker shock?

Alternatively, given this risk, you determine you do not want to put the pressure on your customer but rather look at decreasing margins to help sustain the business. Rising labor costs not only within your own company but every third party you rely on already is and may continue to tighten your margins. So you slowly begin to thin out your safety net to hedge against further inflation. Then, you see a decline in consumer discretionary spending, which many companies are already facing now.

Facing these dilemmas, the answer to this question of adaptation for businesses in the current climate seems to be there are no easy answers. But still, companies must take action.

Case in part: As of the past few days, we are seeing companies tied to consumer spending such as Stripe, the large merchant processing company, laying off 14% of their workforce as they prepare for poor future company guidance. They are not the first nor will they be the last. Other major tech giants such as Apple and Amazon have already announced hiring freezes and more came this week as Meta, Facebook’s parent company, laid off 11,000.

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Like it or not, inflation is here to stay, for now. How long? Nobody knows, but what we do know is sitting on the sidelines is not what a business should do; rather, you should have an action plan on how to not only sustain, but grow out of this challenge.

One of the biggest mistakes I have seen during the COVID-19 era of businesses is the rapid rise in business spending in order to complement the surge in consumer spending. While many were over forecasting and spending or hiring like crazy, my business was preparing for the downturn and automating to handle changes in either direction.

Each business presents its own unique moves available to make at this time, but ultimately there are some core concepts to consider:

Workflow optimization

One of the biggest reasons companies hire so fast is they can not outpace the rapid demand from consumers. For example, more sales means more customer service, right? Not necessarily. Companies need to always be trying to streamline processes to figure out when they can remove the need for an employee. Why are your customer service reps constantly answering the same question? Building internal and customer-facing resource guides are a sure way to optimize your employees’ time on handling support tickets as well as reduce the need for customers to reach out in the first place. Philly tech company Guru Technologies is an example solution to quickly scale internal resources for your team.

Always be auditing the customer experience. Really, that’s true for every single area of your business. What tasks are your employees doing which can be replaced via automation or better tools? Resources such as Retool and Zapier have been proven to speed up tasks so your employees can focus on other challenges. Stop doing the same thing manually over and over and look to streamline where possible.

Expense audits

Nothing is a quick and easy fix. Do not go and sign up for every new software out there thinking this is your solution to optimization. It is critical to periodically do an expense audit for your business. You think it’s hard to keep track of all those streaming services you use personally and get auto billed for? Well, when you’re spending millions of dollars a year in a business, it becomes much harder to isolate expenses. Who is using what and why can be a needle in a haystack.

Having an audit of your expenses not only ensures you are getting the right ROI, but can open up conversations with your employees to understand and audit their own within the company. I can successfully give raises to my employees as their capacity for more challenging tasks rises. But if someone is stuck doing tasks which do not generate higher ROI or are manual tasks which require little to no effort, there is no justification for pay increases. As you grow, your employees should grow with it.

Debt optimization

COVID has taught us, from a business standpoint, that companies were not prepared for a sharp decline. Understanding what happens if you see a 10%, 20% or more decline in revenue to your company is critical. How long can you operate if your revenue declines?

Once you have an understanding of what your model looks like, you can start to construct your options. To me, it does not matter if you want to raise cash or not — you should always be looking at capital options, which include, but are not limited to:

  • Business line of credit
  • SBA financing
  • HELOC
  • Business partnerships

(Disclaimer: I am not a financial advisor and this is not financial advice.)

Inventory forecasting

If you sell consumer products, another COVID-era learning from other companies’ mistakes is in over ordering. Supply chain caused tons of panic in the retail industry. And rather than preparing for a possible dip many retailers over ordered as if the money would keep flowing. This fall shopping season, retailers are facing stockpiles of insane volume. The Washington Post reports stores are sitting on a record $732 billion of merchandise and finding consumers aren’t interested. Hmm … wonder why.

Like I mentioned above, by having a ROI focus in place can you look at your model and understand what it would be like to adjust inventory forecasting to reflect a better ROI. Sure, your margins may be better if you stock everything but if you are able to drop ship and your margin drops 10% you are now derisking and allowing your usable cash to get you farther.

Partner relationships

Oftentimes, one of the most overlooked strategies in any business is improving the partner relationships you have. When doing business with any other company I always treat others how I would want to be treated. And no, I am not talking about pleasantries here. What if you were to operate your business relationships as if you always maintained the best interest of the other party?

Doing a simple analysis of your own business and determining key challenges and strengths, and then doing the same for your business partners, you soon will learn how you can creatively solve each other’s problems. Conversations no longer become negotiations but instead become collaboration. Instead of leaving you with a vague statement like another self-help book, let me break down a specific example:

During COVID, in my own business, we knew our partners were being hit with some big challenges. Employee shortages were creating supply chain issues for warehouses. They were unable to ship and even store the surplus of inventory they needed to keep up with all the demand.  By doing our own internal strength/weakness analysis we knew we had plenty of excess space but knew what must go up must come down. Predicting inventory forecasting could get tricky once the free money period ran out in the US (ie. stimulus checks, child tax credit, etc). So what did we do?

Already on net terms but knowing we were faced with consumers who wanted everything they ordered today, yesterday, we came up with an idea. We tested consignment inventory and offered our top tier vendors only as much space as they needed for surplus inventory. In return we were able to inventory this as our own and drive up our catalog’s capability to offer same day fulfillment on more products. Best of all, we maintained our net terms structure we already had in place but only on what we sold. We increased our return all the while de-risking our inventory forecasting plan while solving our business partner’s challenges. A win-win.

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I’d love to speak with other business owners about creative problem solving in the current economy. Use this form to submit questions related to this piece or your credentials if you have advice to offer fellow business owners as well. If we get enough of a response, Technical.ly will help us host a virtual event to come together and discuss. You can also join Technical.ly’s active community Slack and start posing questions now as I’ve already done. Hopefully, talk soon!

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