Surviving The Coming Austerity

By: Sal Palma

AusterityLeedsTxistockphotoE3x4I’ve had the opportunity to sit down and discuss business conditions with a few small businesses operating in the industry this Blog serves. It is clear there are concerns. Some have been in business for a relatively short period of time. Their products have been relatively successful in the market, but it takes time to build a brand.

The concerns cover the gamut from taxes, sales and marketing, financing, growth prospects and a number of other issues as trivial as keeping your spouse out of the day-to-day business activities. I’m sure many of you have the very same issues these individuals have. So, I want to share some ideas to help you plan.

  1. Austerity cometh, and it will hit the DOD hardest. If you look at the DOD’s FY 2013 budget, personnel costs are a whopping 24% of the total budget; representing just over $153 billion. When budget adjustments are considered, the big ticket items receive much of the scrutiny and you can expect an aggressive contraction in the force with the possible exception of USSOCOM. Driving the reductions is an overall realignment of the military services and the very real fact that personnel costs exhibit the largest cost increases year over year. With less soldiers, sailors, marines and airmen you can expect a comparable reduction in gear and equipment sales.
  2. As many of you know, military sales typically cover your fixed costs but don’t do a great deal towards profit. With Iraq and Afghanistan at a close, the commercial space will loose visibility of the “soldier warrior” so you can expect consumer demand to shrink. Consumer demand will shrink further as a result of decreases in disposable incomes.

When combined, line items 1 and 2 will hit your profit and loss statement in a measurable way. However, this does not mean that you abandon your dreams and close up shop. But, you need to stay competitive and that will require discipline. What are some of the steps that you can take to survive.

  1. Build your brand. This does not mean you need to develop new product, which could be very costly. It means you need a marketing strategy, so team up with a solid public relations firm and collectively explore the overlaps and possible crossover points to other applications in your existing line. For example, if you’re manufacturing military packs, in many cases it will cost you little or nothing to modify the design or process to make a pack for skiers or hikers.
  2. There’s a hackneyed cliché “safety in numbers.” Look for partners. Consolidation is not a bad thing. Partnering up with other companies, even a competitor, can have a beneficial outcome; especially in production and sales. It’s a good way to leverage the strengths and mitigate weaknesses. Do not overlook teaming or partnering.
  3. Sales receipts are your company’s income. Don’t treat them like your personal cash register. Pay yourself a salary. Use your cash flows for working capital not to buy something for the kids.
  4. KNOW YOUR COSTS! Never pass up a discount and never fail to ask for one. Quite often if you pay a receivable with 10 days, the supplier will grant an extra 2%-3% discount on your invoice – never pass that up! Avoid hitting your line of credit whenever possible. Expect credit to be slightly more difficult to obtain.
  5. Keep your supplies and raw materials inventory as low as possible. Quote lead times from order to shipping, but don’t let them slip – pleasantly surprise your buyer always. Don’t hesitate to charge for expedites. They cost you more and sometimes disrupt your orderly process. If a buyer wants something sooner they should be willing to pay for it.
  6. Don’t get caught up with the I should be making more profit trap. You’ll need the cash flow and turns on your inventory to be successful. If you need to take a discount do it. You may find volume takes care of the rest.  I have to share a story here. I had a guy tell me that if he needs to sell product at a loss he’d do it because his volume would go up. Selling at a loss can never be made up with volume folks.
  7. Advertise, let people know who you are, what you do and how much better you do it than the other guys. Remember that sales always lag advertising by several months.
  8. Sit with an accountant and develop a budget. Budgets force you to plan. Remember that people fail because they fail to plan and not plan to fail. Planning and execution is at the heart of any successful venture.
  9. Lastly, how do you finance your business. There a numerous ways that involve private capital, bank financing or any combination thereof. Your mix needs to provide you with the lowest cost of capital in your risk class. Don’t expect a prime + .1% if you’re still working out of your garage.
  10. Stay positive and upbeat. You have what it takes to succeed!
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