My first downturn: A SmartCompany primer

For many young entrepreneurs, the current downturn is the first time they have experienced anything like it. EMILY ROSS speaks to three business owners about their practical plans to weather their first downturn and keep growing.

By Emily Ross

For many young entrepreneurs, the current downturn is the first time they have experienced anything like it. 

We speak to three business owners about their practical plans to weather their first downturn and keep growing.

 

 

 

When Phillip Di Bella started his business Di Bella Coffee, he picked the business for several reasons. He’s Italian, he has a passion for premium coffee, which he believes his customers share – “and if people stop drinking coffee because they can’t afford it, we are in big trouble”.

His theory so far is spot on and his business, which started in 2002 as a one-man-band, now employs 68 people across three states. “We haven’t had a downturn at all,” he says. Not that Di Bella is complacent. “I like to put a machine gun to my business every day and look for the bullet holes,” he says.

Six months ago Di Bella noticed his clients were taking more time to settle accounts. He created a training regime for accounts receivable staff to find new ways to persuade people to pay on time.

Di Bella now offers clients the option of a monthly direct debit credit card option rather than paying weekly – this means they can keep their cash for an extra three weeks but still pay Di Bella Coffee on time each month.

He also offers creditors with outstanding accounts the option to freeze the outstanding bill for an agreed time, but continue to receive Di Bella Coffee for cash on delivery. Di Bella has also introduced a penalty price increase of $2 per kilo for coffee if clients default three times.

There have been sales drops in some areas of the business. For example, in October wholesale sales were down 10%, but Di Bella has been able to focus great efforts on the growth of his retail and office supply coffee business Coffee Central that delivers to homes, shops and businesses. “People haven’t stopped drinking coffee, just where they drink it.”

Di Bella isn’t denying the economic climate is radically different. His customers are changing and he needs to keep reacting to consumer patterns and adapting his business.

Tough times

The economic clouds are hanging over all businesses that must in turn individually react to their circumstances. The major indicators are all sobering – the ANZ job survey has job advertisements down 5.9% for October; Treasury forecasts unemployment to reach 5% by June 2009; and the Australian Industry Group reports that 40% of businesses are planning to cut staff numbers.

“It’s scary times,” says insolvency and forensic accountant Norman Jones of Courtney Jones & Associates. One of the mistakes Jones sees businesses making is not being conscious of areas of risk for the business, taking the attitude that “this can’t happen to me”.

Jones says companies must look at all elements of the business, starting with obvious areas such as debt, equity, overheads and cashflow. “It’s all about being able to react to a set of circumstances,” he says.

Jones cites the example of a client, a timber merchant who recently anticipated the slowdown in the building sector and cut its outlets from 13 to eight. “By consolidating, the company is protecting its customer base and is now seeing an improvement in margins.”

Still growing

Consolidation is not on the cards for entrepreneur Andrew Staite – he is still employing new staff as his one-year-old business is on target to more than double revenue this financial year from $4 million to a forecast $9 million. “Luckily all our budgets were built around the slowing economy,” he says.

In early 2007, Staite left his plum role as managing director, Australia and New Zealand, of executive recruitment firm Hudson. After several months “garden leave” he co-founded Staite Henningsen Klein (SHK) with three other partners – just around the time the term “sub-prime” was starting to dominate the media in October 2007.

SHK is managing to stay on track despite specialising in recruitment for senior staff in the high $100,000 to $500,000 range. According to Staite, companies are still hiring and are especially looking for staff with downturn skills, such as restructuring change management and human resources.

With the blue-chip track record of its founders, it would have been easy for SHK to secure funding from the banks, but the partners put their own money up instead. (Staite has a 60% stake in the business.) Finance facilities were set up, as well as corporate credit cards, just in case, but the business is “absolutely cashflow positive” says Staite.

SHK has 18 employees, up from eight at its inception, and Staite figures he is better off than a lot of the larger recruitment players – lower overheads, less non-revenue generating staff, and way less debt.

Looking back, Staite wishes he had jumped ship earlier. “It is far more fulfilling being a smaller, private company,” he says. Meanwhile shares at Staite’s former employer Hudson are down more than 65%, from US$13 in June 2008, to US$4.54.

Staite’s downturn survival strategy centres around making sure his staff “are out there talking to customers all the time”. In times of crisis, desirable candidates are less likely to change jobs, so it is harder to dislodge people.

In October, Staite hosted a weekend retreat at Daylesford, Victoria, for staff to look at SHK’s business strategy. Part of the company’s plan is to anticipate what the major recruiters are doing “and leverage off their weak points”,” he says.

“We will continue to grow and achieve it at the expense of other firms.”

Norman Jones recommends identifying what he calls “the pillars of power that drive the business” – exactly where the revenues are coming from, for example. “If that market is discretionary expenditure, the business case at the moment needs to be very conservative,” he says.

Defending the discretionary spend

A classic sector dependant on discretionary spending is the day spa industry – $200 mud wraps and half-day spa treatments are the kinds of luxuries many cannot comprehend when the All Ordinaries is hovering around 4000 (down from 6259 in January 2008).

Sue Homewood, co-director of Melbourne day spa Body Freedom, knew the market was turning when clients started cancelling appointments at the last minute late last year.

With 12 permanent staff and two under contract, staff is Body Freedom’s biggest overhead. But cancelled appointments means paying staff to stand around and fold towels rather than bringing in revenue.

Homewood, a former investment and fund manager, quickly realised that the business could not afford to have staff working when clients didn’t show up. “That is our big concern,” she says.

To maintain prices and stay in business through her first downturn, Homewood’s solution has been to take a 50% deposit via credit card from customers when they book an appointment. If clients cancel less than 24 hours before an appointment the spa charges 50% of the fee for late cancellation. If cancelled less than three hours before an appointment, 100% of the fee is charged.

“I felt nervous about doing this,” says Homewood. “I never wanted to profit from cancellations.”

The introduction of cancellation fees has been a secret to protecting cashflow and getting the most value out of staff rosters. It is also a strong incentive for clients to turn up for their treatments.

The cancellation cash sits in a separate account with gift voucher revenue, creating a vital pool of funds to hedge against fluctuations in bookings. “Those cash reserves have a cushioning effect,” says Jones. And in another tactic to keep staff costs under control and reduce double-time penalty rates, the spa now only opens every second Sunday.

Homewood and co-director Jacqueline Johnston are pragmatic operators. The business has no debt due to the last-minute withdrawal of a bank loan days before the spa was launched. Their savings were invested instead. The early days were tough (long hours and no spare cash) but the business has been cashflow positive from day one. “We are still on that growth curve,” says Homewood.

One year after the sub-prime tremors began, Body Freedom’s revenues are up 20%. The coming Christmas is traditionally a bumper time for spas with a flurry of gift voucher sales, however the new year is expected to be tough. “Then we may have to downsize,” says Homewood. If things get really tough, treatment rooms can be rented out.

Rather than having one fixed business plan, Homewood talks in terms of “scenario planning” – having a range of strategies in place in order to be able to adapt quickly to market changes.

At SHK, Andrew Staite is also acutely conscious of the need to continually take the pulse of the business. He works closely with SHK director Justin Bender, whose day job is chief financial officer of east coast law firm Herbert Geer. Bender brings extra professional services knowledge to the business.

Staite also consults his mentor of 25 years, who works in the mining sector. “He has taught me to focus on long-term strategy and be willing to tweak that strategy in the short term.”

Survival check list

• Stay lean.
• Be ruthless about non-revenue generating overheads.
• Be obsessed with customers.
• When making business plans, make sure there is a worst-case-scenario strategy in place.
• Have a downsizing plan.
• Understand every possible facet of your market.
• Introduce necessary measures to protect cashflow.
• Consult mentors and advisers.

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• Protecting your brand in a downturn
• 10 ways to lose your business in a downturn
• How is your sector faring in the downturn?
• 10 tips to get people management right in a downturn
• Get your business downturn ready
• 10 tips to break the cashflow drought