Recession has been on the mind of Tanya Allford-Thompson in recent weeks. While business is good today, the co-owner of The Amazing Cakes Bakery in Mableton, Georgia, is keeping her eye on reports that the nation is headed toward a recession (two consecutive quarters of negative economic growth) and contemplating what that would mean to her 5-year-old business. “Other business owners come in and buy bakery items for their clients,” says the 43-year-old. “If they don’t have as many clients, then they’re not buying as much from me.”
Allford-Thompson’s worries are shared by many. Seventy-one percent of American workers say the economy is either headed toward a recession or is already in one, according to the Principal Financial Well-Being Index, a quarterly survey by the Principal Financial Group, a financial services company based in Des Moines, Iowa. “The small-business owner has increasingly been going through difficult times,” says Marilyn Landis, chair of the National Small Business Association, an advocacy group based in Washington, D.C. A recession would only make things worse since it would lead to less available cash for small-business products and services, prompting experts to urge business owners to take precautions now.
“We really don’t know that we are in a recession until at least one quarter after it’s actually occurred,” says Thomas D. Boston, CEO of EuQuant, an economic and statistical research company in Atlanta and member of the black enterprise Board of Economists. “But everyone agrees that the economy is not growing, and there are a lot of signs indicating that even if we are not in a recession, we’re experiencing negative effects as if we are.”
While it’s impossible to predict how many black-owned businesses will go bust during a recession, Boston says, “Research tells us that the survival rate of black-owned businesses is much lower than that of white-owned businesses.” The greatest factor affecting the survival of all businesses is the state of the economy, which can be attributed to 30% of a business’ performance, adds Boston.
Black-owned businesses are particularly vulnerable during the current economic downturn. “The three industries having the largest receipts for black-owned businesses are healthcare, retail trade, and construction,” says Boston. “The latter two are being hit very hard by the economic conditions.” He says real estate sales are also being affected, which is unfortunate considering the high concentration of blacks in this area too. “And if you add to this fact,” continues Boston, “a disproportionately large share of subprime mortgages were pushed on blacks during the real estate boom, and the average black household has virtually depleted all of its real wealth because of indebtedness, these conditions have the making of a perfect storm.”
The Federal Reserve has acted aggressively to forestall a recession by cutting interest rates by 2.25 percentage points between Sept. 18, 2007 and Jan. 30, 2008. Congress is doing its part to curb a recession as well. A bipartisan economic stimulus package unveiled in January would let small-business owners write off up to $250,000 in capital expenditures for office equipment such as computers, photo copiers, and furniture in 2008, up from $125,000 in 2007.
Small-business owners are taking a double hit since they have personal and professional bills to worry about. “I’m paying two gas bills, two telephone bills, rent, and a mortgage,” says Allford-Thompson. Un
fortunately, if clients become scarce and cash flow is low, it is the business owner’s personal obligations that often go unmet first, says Landis. “The first one that doesn’t get paid in a cutback of any cash situation is the owner,” Allford-Thompson adds. “We’re the last to get paid and the first to cut our pay.”Surviving a Recession
Experts say small-business owners should take matters into their own hands before a recession is officially declared, if they want to withstand economic pressure:
Get finances in order. “The days of easy credit are gone,” says Landis. “Take the time to make sure your financial statements are good, strong, and clean. Make sure they show your cash flow. If you get the opportunity to talk with a funding source, you need statements that answer questions not raise questions.” Boston suggests that business owners stockpile enough cash to cover four to six months of expenses. To determine that amount, William R. Patterson, CEO of The Baron Solution Group, a business consulting firm in Washington, D.C., suggests that business owners look at their financial statements for the last few years. Also factor in new risks, such as inflation and higher fuel and commodity costs.
Analyze profit streams. “One mistake many business owners make is, when a recession hits, they’ll lay off people because the staff is the easiest thing to cut,” says Patterson. Instead, business owners should figure out what customers are most profitable and come up with new products and services to sell to them, he suggests. For example, a large-scale caterer might offer small meal delivery services to her clientele or someone who sells office equipment might begin to offer service contracts for an extra charge. Also, figuring out what areas contribute the least to the bottom line lets business owners know where to cut costs first.
Ramp up marketing. During a recession, there is often a drop-off in sales. “You need to find additional ways to bring in new customers,” Patterson says. For example, after noticing a slight sales dip, Allford-Thompson expanded her marketing efforts: “We go neighborhood to neighborhood, door to door, and pass out fliers and give out samples.” The move worked, she says. Not only did she see more customers, but those who brought in the fliers offering free samples also purchased additional items.
Cross-train employees. If tough times persist, business owners may be forced to lay off staff. Before that happens, business owners should train employees to handle multiple tasks across the organization. For example, a salesperson could be taught some of the company’s marketing procedures and vice-versa. The use of independent contractors for short-term projects could reduce the cost of benefits, Patterson says. Likewise, outsourcing some functions such as accounting or information technology could be an option, he adds. “You don’t want to lay off a person and then have to figure out how a particular process runs.”