What are the biggest mistakes small companies make during a downturn that lead to unnecessary failure?
First, failure to establish multiple profit centers and congruent revenue streams. Establishment of this lowers your operational risk. If something happens to one of your revenue streams, you have additional sources of income that can help sustain your business until you fully recover.
Second, is not having sufficient working capital. Working capital is important because it is a measure of a company’s ability to pay off short-term expenses or debt. It is calculated by subtracting your current liabilities from your current assets. It is essential to a company’s fundamental financial health and operational success, especially during a downturn. Successful working capital management is important to maximizing your operational efficiency.
Third, is not tending to the needs of your customers or clients (Patrons, the 5th P). You should ask them what they need or want to make their life easier during the downturn. Patrons are on of the most important components of a company, as patrons bring your business revenue. It is important that you develop a diversified customer base. Most businesses follow the 80/20 rule where 80% of your revenue comes from 20% of your client base. If something happens to that 20%, however, then 80% of your revenue is at stake. Diversification is key here, as it lowers your operational risk, a critical component of thriving during a recession.
Fourth, is a lack of AIM: Always Innovate and Market. When it comes to business, ‘AIMing’ is the name of the game. Too many business owners get stuck in the same process and routine when running their company, causing them to fall behind in comparison to their competitors. When an industry is evolving or customer demand changes, your business needs to be nimble enough to pivot. This could include tailoring your products to suit new customer preferences, integration into a similar industry, or capitalization on new customer markets using innovative marketing strategies. Whichever the case may be, failure to do so could potentially push your company to the brink of bankruptcy.
Written by Michelle Seiler Tucker, author of Exit Rich and founder of Seiler Tucker Incorporated.