Thursday, November 27, 2008

Planning for downturns.

Planning for downturns would seem easy, wouldn't it?

But it's extremely difficult.

If you simply react to each downturn on the way down, you are losing money every month. By the time you reach bottom, you may not have any money left, or be so deep in debt that you can't sustain business.

On the other hand, if you cut spending too fast or too soon, you potentially create the very conditions that lead to a downturn in sales.

What to do?

The example I always use is a month to month chronology.

Let's say you've had several years of month to month growth. Then suddenly, you have a big drop for one month. So, you hold your breath and wait for the next month before reacting. Next month you're down just a little bit, not much to worry about. So you wait again. The next month you're up a little bit.

You breath a big sigh of relief. Everything is back to normal you think.

The next month you have a huge drop, followed by another huge drop.

Now you're ready to react.

But wait, the current month is very good. Indeed, you end the month up.

So you freeze your response another month.

The next month is down just a little, again. Not enough to panic about.

Then another slightly down month. And the next is another almost even month.

And then the bottom falls out, and you have two horrible months in a row.

You finally let go that favorite employee, you finally cut your orders. You finally admit the climate has changed.

But what's the score?

You've just had 10 down months and 2 up months.

It's just human nature not to overreact. If you're a small businessman, you are by nature a very optimistic person. You aren't going to react to every little change.

It's only after you've been through the above scenario several times that you go ahead and make the drastic cuts early.

The above is almost exactly what happened to my store -- in terms of sales -- but I started cutting expenses before it even happened, and was well ahead of the curve all the way down.

I'll never know how much of a downturn would have occurred if I HADN'T started cutting, but I know that I simply couldn't wait around and lose money and find out.

Besides, I think events have proven that I was right.

2 comments:

Duncan McGeary said...

The conclusion I came to was the money I didn't make was not equal to the money I actually lose.

Same thing with the upper parts of a bubble -- you have to back off well before the peak if you don't want to get caught, meaning that you don't make money on the upper end.

But you also don't lose it all.

BilboBend said...

This is going to be the biggest fucking downturn in your lifetime.

How do you prepare?

Are you old enough to fucking survive the cycle?

Are we in Year 9 ( aka 1938 )? Or are we in Year 3 ( aka 1932? ), or are we in year zero ( aka 1929 ); with at least 13 years of hardship?

Most likely somewhere in the middle so call it 7 yrs, and most likely double that because this one is going to be WAY bigger. Back in 1930's the US had Oil, Money, it was a creditor, and not a debtor. The US may NEVER crawl out of this one.

Most likely the next 7 yrs, will be austere and out of that is a new world order much like a typical mexican village where people just get by.


Survive? Market yourself get out on the street and let people know what you got, albeit the people on the street may think you got money.

I think crime will skyrocket.

The smart thing to do would be to sell the business to some young kid, who has a lot of money or an inheritance, and let him do what you did back in 1986. If you owned your building at least you would have income. Don't worry about inventory all your competitors everywhere will be BK, and you'll be able to buy their product penny's on the dollar.

The cabbage patch doll years are over for a generation.