Economic Conditions Affect Business

By Tim Reynolds
President, Tribute, Inc. and President, COSE (Council of Smaller Enterprises - Cleveland)

Well it’s official. Our economy is in a recession. Of course, economic conditions will affect different businesses in different ways and some of you may be having a great year. But for those of us that have seen our business volume turn down, it’s time for some clear thinking. This will be my third major recession as a business owner and I thought I’d share just a couple of the lessons I’ve learned along the way.

First, denial is the enemy. If your business needs to be smaller for a time, bite the bullet and make it smaller. Failing to take the steps you need to preserve your capital and match your business expenses to achievable revenues is the reason businesses fail.

Only then are you in a position to take advantage of the opportunities recessions have always provided flexible business owners. For example a competitor may stumble, or perhaps a vendor may lay off a talented employee that can take your company to a new level. You may have to lay off employees of your own. That’s painful of course, but it also gives you the opportunity to rethink important business processes. What you do now will lay the foundation for profitable growth thereafter.

Fortune's Feb 18, 2008 issue has an article written by management guru and Wharton faculty member, Ram Charan, which is still timely and offers some useful advice to weather the recession. I found a couple of his tips relevant:

1. Keep building. When the top line looks shaky and the bottom line worse, the temptation is to go after discretionary spending. Fine - but do not consider product development, innovation, and brand building optional. Sacrificing your future for a slightly more comfortable present is not worth it. If you keep building, you can come back strong.

Tribute continues to offer our customers new tools to streamline their business and cut costs. Our users determine the innovations most beneficial to the group as a whole and we implement those tools in our regular releases. We’ve partnered with WarehouseTWO to offer our customers an easy and convenient method to do inventory-sharing, enabling them to get rid of excess inventory and provide another means to fill backorders.

The "American Recovery and Reinvestment Act" has extended the Section179 tax expensing limit to $250,000 and boosts the overall investment limit from $510,000 to $800,000, so this is the year to invest in making your company as efficient and profitable as possible.

2. Communicate intensively. Get information from where the customer action is, and get it to the operating people - fast. Companies should do so routinely, of course. But they don't. It's counterintuitive but true that when the economy slows down, the pace of decision-making has to speed up, because you can't put off the tough choices anymore. The companies that are readiest to act on solid information are primed to shoot ahead of the business cycle.

Partnering with Rubber Tree Systems, Tribute now offers TrulinX Mobile and Tribute Mobile, a business intelligence and sales force mobilization system that extracts the data from our Tribute & TrulinX systems and shares it with any mobile device. In this economy, access to up-to-the-minute data is a must.

Clear thinking and an open mind are critical to small business success. Tribute is ready to help you take a hard look at your business processes, compare them against the best standards in distribution, and show you how our software can help you achieve Best Practice. We continue to invest in product development and innovation to best serve your needs. We can help you keep the “blinders” off and streamline your business so you can be ready for the good times to come.

To find out more, visit www.tribute.com or call us at 800-874-2883 and press “1” for sales.

About Tribute, Inc.

Tribute, Inc. is the leading provider of enterprise-wide distribution management software to the pneumatic & hydraulic, power transmission, belting, sealing products, automation & motion control, instrumentation and hose distribution marketplace. We specialize in providing superior tools combined with personal and knowledgeable customer support for this specific niche. Our customers are more than just a number – they are partners with valuable input that drives the direction of our product. Tribute has provided a comprehensive management solution for industrial distributors for 28 years and is an active member of FPDA, ISD, NAHAD and NIBA.

What’s going on?

It seems clear our economy is slowing down. Although 1^st quarter GNP grew at a slow rate, our newspapers are filled with stories on a troubled economy. The sub prime loan “crisis” has shaken the stock market. Oil prices have increased well beyond previous record levels. Food prices, metals prices, and other commodities have also seen dramatic rises. The Fed has acted aggressively to support our financial infrastructure and interest rates are very low indeed. All signs point to a recession, and we should be very worried about inflation at the same time - what is known as “stagflation”.

And yet:

Nearly every prospect and every customer we talk to is enjoying a very successful year, on top of great results last year. Industrial Distribution magazine reports that the Top 50 distributors ALL report record years in the making. The US manufacturing sector is thriving.

A big part of the answer to this paradox is those low interest rates mentioned above. They have resulted, over a period of several years, to make the US dollar “weaker” against other currencies. As a result, our various products have become much more competitive in the international markets. Our exports are truly booming and this is great for manufacturing, and therefore great for industrial distributors.

However:

That won’t make your job less difficult. Although interest rates are low, lenders have become very timid, given the impact of the sub prime loan problems on financial markets in general. This always impacts small businesses first, and hardest. No doubt you have experienced this if you’ve tried to increase a working capital line of credit lately, or borrowed to purchase a capital asset. Rates are low, but credit standards are very tight indeed.

In addition, given rising commodities prices and more costly imports (the other edge of a weak dollar sword), inflation is a very serious concern. This will impact your business in the form of rising purchasing prices, as manufacturers pass the costs of higher metals and other raw material prices along. This has been going on for several years, of course. The problem comes in maintaining your margins in a competitive market place. In addition, those of you that distribute for foreign manufacturers are seeing prices there (due to the weak dollar) rising much more quickly.

A well run distributor has the tools to deal with these issues and utilizing an ERP solution geared toward your industry is of primary importance. Other than that, there are really only three things to do.

First, aggressively manage your purchasing. Make sure you are buying only what you need, when you need it. Understand your demands at the item level, if necessary. Are you truly using the power of your software to support aggressive purchasing and inventory management? If you haven’t implemented any more than “min / max”, now is the time to dig in and get to a more sophisticated, aggressive and effective process. From the theory behind the process, to the practical applications of inventory management, your software should support Best Practice.

Second, just as you aggressively manage your inventory costs, you must manage your pricing. You need to work toward being able to actively manage each item’s price for each customer, what is labeled “strategic pricing”. You may have a big customer that aggressively negotiates and shops key items he buys from you. But other items he buys out of convenience. He’s not shopping those items, just adding them to the PO. Why give him the deep discount on those convenience items? He’s willing to pay more and probably won’t even notice if you give him your standard discount. There are several other pricing strategies like that one available - if you do the analysis and really understand what each customer is willing to pay. David Bowders of Strategic Pricing, Inc. can help you implement this very important pricing philosophy.

Finally, all small business owners know the importance of low overhead. Now is the time to aggressively manage your costs. If inflation takes hold, this will be critical to your ability to do business. Your software should have detailed reporting capabilities to manage your budget line by line and the tools to make your operation more efficient and streamlined.

If you’re a small business, joining an organization like COSE, the small business division of the Greater Cleveland Partnership – one of the nation’s largest metropolitan chambers of commerce, will help you lower costs by providing group purchasing programs that reduce the direct cost of doing business, and open doors to government agencies, business and community organizations, and economic development partners that can address your business concerns.

There is much to be optimistic about with the US economy. But we all have to manage our way through the ups and downs. Taking advantage of small business resource center of your local chamber of commerce and the tools offered by a well designed and industry specific software will help you lower costs and run your business more efficiently and profitably.

Tim Reynolds is the Chairman of COSE, the Council of Smaller Enterprises, and the President of Tribute, Inc., a firm specializing in distribution management software and support for industrial product distributors. He can be reached at treynolds@tribute.com.