To say that 2020 tested small-business owners’ management abilities is an understatement. Many went out of business for reasons beyond their control — the effects of the pandemic. Some are just hanging on, while others are preparing for an uncertain business environment in 2021 — but with some optimism because of the promise of the COVID vaccines.
The 2021 business environment will remain challenging at best. In spite of the optimism most business owners will have to adjust to the new “normal” while at the same time focusing on business basics.
The National Federation of Independent Business is the largest small-business association in the U.S. In their December 2020 Report, they found that their Optimism Index declined by 5.5 points to 95.9. This decline is below the average index value since 1973 of 98. The report states, “Owners expecting better business conditions over the next six months declined 24 points to a net negative 16%.”
According to Bill Dunkelberg, the NFIB chief economist, “Small businesses are concerned about potential new economic policy in the new administration and the increased spread of COVID-19 that is causing renewed government-mandated business closures across the nation.” Another metric that the NFIB conducts is the Uncertainty Index. It too decreased from 90 points to 82 points.
What to do in an Uncertain Business Environment?
Given this new data, business owners should plan, prepare, and pursue their business plans in 2021 with the idea of remaining flexible. Six main steps are advisable.
First, focus on cash flow, the No. 1 problem that almost every business faces during uncertain times. You can never have enough of it. Drill down on expenses. Examine what is a must have vs. a nice to have. Remember, any reduction in expenses drops to the bottom line and improves cash flow.
Second, focus on profitability. Capital spending plans should be examined closely. If your balance sheet is weak, you should probably postpone any capital spending for the next six months. On the other hand, investing in equipment and technology that reduces monthly salaries or other expenses should be considered. Look hard at your technology platforms expenditures.
Examine the profitability of each of your client accounts. Take a look at the gross margins of each account.
Third, examine your inventories. Liquidate obsolete inventory as soon as possible. Hold that cash in reserve. Jettisoning old inventory is one of the quickest moves for strengthening the balance sheet.
Fourth, examine your business plans. Ask yourself, “Are my current business plans in tune with the near-term business environment?” If not, immediately adjust those plans to align with the current business environment. Your business plans may have included business expansion. Depending on the type of expansion, organic growth (internal sales growth) or inorganic growth (acquiring a competitor for example), may still be the right move.
Acquiring a business now may give you added customers, increased cash flow, and more profitability than trying to grow a market or expand organically. Remember, if your balance sheet is strong, you probably have a low debt to equity ratio. Therefore, borrowing funds for an acquisition may be cheaper than funding the acquisition through current cash flow.
Cost of funds is cheap and readily available. The credit markets have never been friendlier. The Federal Reserve promises that it will keep interest rates low almost indefinitely. Current average interest rates for short-term borrowings stood at 4.8% and long-term borrowings stood at 5.5% as of November 2020.
If you plan to borrow funds for an acquisition by tapping the credit markets, consider an SBA (7a) loan. If you plan to purchase commercial real estate of heavy equipment, consider an SBA 504 loan. There are many advantages to owning versus leasing commercial property.
If you plan to sell your business within the next two to three years, 2021 may be the best year yet for obtaining the highest enterprise value. There is so much money on the sidelines waiting to purchase a business that owners are accelerating their exit strategies.
Fifth, take a hard look at your client base. Many businesses suffer from depending on the “whales” of their client base (more than 50% of your revenues), which increases their concentration of risk. Losing one or more whales could sink a business. Focus on finding more clients.
Sixth, examine your labor costs. Finding and keeping the best employees is a strong safeguard for retaining clients. However, this may be the right time to “prune the bush” of underperforming employees. While its hard to fire anyone and replace them with more talented personnel, your business future rests on strong, talented personnel to retain clients. Keep in close contact with your most valuable clients. Monitor their satisfaction with the products/services you sell them, and the customer support you give them.
Now for Some Good News
The economy is entering 2021 much stronger than most experts expected eight months ago. GDP is close to its highest levels since 2019. While COVID-19 will follow us throughout this year, vaccines are in the pipeline and will eventually allow the nation to retard and eventually eliminate it.
As the economy moves into 2021, many of the 2020 challenges will follow. But new opportunities, creativity, passion and the resilience of small-business owners will certainly change the business landscape going forward. We can expect that whatever the new normal is, business owners will still be the backbone of our economy.
Author Gary Miller is CEO at GEM Strategy Management. Read more from GEM Strategy Management here.