The Small Business Death Spiral

22 Jul

Seth Godin has a fantastically insightful post about small businesses and how they can spiral into failure during tough economic times.  I love this post, because this is what I have been telling small businesses for about 6-8 months. Seth talks about how businesses can let fear and poor economic times lead them towards an inevitable death spiral of failure:

You’ve probably seen it. The fish monger sees a decline in business, so they have less money to spend on upkeep and inventory, so they keep the fish a bit longer and don’t clean up as often, so of course, business declines and then they have even less money… Eventually, you have an empty, smelly fish store that’s out of business.

It’s so easy to see how businesses can set themselves up to fail in this economy, but somehow the businesses themselves have a hard time seeing it. Instead of realizing that economic times like this are “crunch time” and as a business owner this is “do or die” time, people panic, lay off the wrong people, cut the wrong expenses, and watch their business go down the drain.  I have heard businesses tell me countless times in the past 8-9 months things like:

Thank goodness I cut my marketing budget  – my sales are way down this month.

or

I am not sure what’s going to happen with the economy – it scares me, so I laid off all my very highly-paid salespeople.

These people are going down the death spiral described by Seth.  The company that cut their marketing budget might want to think about the reason sales are down. Maybe the downturn in revenue tracks to spending less in marketing? If you are worried about making your sales numbers, maybe cutting the best salespeople you have is not the best idea.

When things get tough, when money gets tight in a business, the best thing to do is PLAN and  MANAGE.  Seriously. Build a worst case scenario financial model, and see when you would REALLY have to let people go.  Track all your expenses directly to revenue, and then spend money that makes you money — and cut the rest of the spend.  Bring your employees on board and explain the  situation, and challenge them to help you keep quality, service, and production high, while finding potential ways to cut expenses. This is also how I have managed Palo Alto Software during uncertain times. Rather than panic, and lay off people because the economy was the worst we had ever seen, I had everyone batten down the hatches, buckle down, and reach for attainable numbers. We cut expenses when we knew other service providers were hungry for customers. We made sure we tracked every dollar spent in marketing directly to a sale. If we couldn’t track it, we didn’t spend it. Then we spent as much as we could in the areas that returned a high ROI. And the result? No layoffs, 3 new hires, and job reqs for 3 more people. We made it through, and are well positioned for the recovery. We didn’t get anywhere near the horribly ugly death spiral. A place where no well-run company should ever get near.

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One Response to “The Small Business Death Spiral”

  1. Natalie MacNeil August 3, 2009 at 5:20 pm #

    Hallelujah! I love this post and your emphasis on planning and managing.

    I have also talked to a lot of small business owners who are cutting back on marketing because times are tough and my response is usually, “Really?!? You want to kill your business?!” Companies like Intel and Volkswagen have increased marketing budgets and GAINED market share during the recession as a result.

    The strong- and smart- companies will come out of the recession thriving and the weak will be left in the dust.

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