When our economy hit the wall in the last quarter of 2008 we, like so many businesses, reacted normally; we reduced the number of payroll employees and hours as much as possible, eliminated some of the days we used the cleaning service, had other services requote to reduce prices, eliminated vehicles, and such marginally productive outlays such as freebie pens and calendars to hand out to customers.
After cutting the most obvious costs, the next step was to examine prices and find points where we could expand margins. In a competitive world where everyone is desperate to make a sale and some competitors even sell below cost in order to generate cash to pay off loans, this is not easy, but if you look carefully and segment your market wisely you will find opportunities.
There are some expenses you find difficulty cutting. When business was good you felt comfortable signing a 6 year lease for 8 trucks, but now with reduced volume you only need 6 trucks and the truck leasing company will not let you out of the lease. But in two years those leases come due and you may re-examine your leases- either staggering them or reducing them.
You start to realize how much time and money it takes to collect a four hundred dollar receivable that is over ninety days old and you eliminate slow paying accounts, and you eliminate bounced checks with check verification systems. You get smarter, able to transfer wasted time from blood sucking, slow paying business to solid customers who respect commitments and the terms of the credit agreement.
You shed the marginal mentality of taking business that in isolation covers its marginal cost but not its share of fixed cost. If you accumulate too many of these orders you will lose money, You learn to just say no.
And when you buy 8,000 gallons of diesel a month you will become very conscience of how you buy your fuel and what the expense is for delivering small orders. Delivery charges and fuel surcharges become acceptable.
When the price of your products declines you rapidly realize the other side of the inventory profits you booked during the price increases a year before. When you have to sell your product for less than you paid for it you cannot lay off enough workers or cut enough expenses to avoid losing money.
Everybody in your business faced the same realities and made the same adjustments. The biggest difference was often the amount of debt incurred at the time business headed south. Those with too much debt are either closed or sold. I was raised in a culture to avoid debt and it served us well in this economy.
Eventually the prices stop dropping and you have cut enough expenses that the bleeding stops and you become profitable on a much smaller volume. Afterwards you wish you had made the cuts faster and earlier, but you did not realize how long the bad economy would last. But just as my dad spoke about the Great Depression for the rest of his life, we will remember this economy for a long time. We will be reluctant to add expenses, rely on rosy forecasts, and commit to long term contracts without protection clauses. The cost cutting ( those truck leases renew in a few years) will continue even after we are profitable. We will continue to simplify, consolidate, and reduce paper work. We will not return to rationalizing crappy business and bad habits.
I reminisce on the last two years for two reasons: it may explain why a recovery from such a severe economic blow will be slow, and this experience and reaction stands in distinct contrast to much of the behavior in the government sector. We in private business are unable to ignore reality and survive; those in government, with the power to tax and print money, can ignore reality for a considerable period of time……. but not forever.