So what does one do when the music stops and there aren’t enough chairs to go around? Most of us stumble through our business life thinking that each day will be much like the previous one. Of course we have learned to factor in such things as the seasonality of our business (shipping more to retailers in the fall than the spring), and over time we learn to adjust to the business cycle. But overall we are on autopilot: we go to the studio and make art, call a few suppliers for more inventory, pack and ship orders, pay our bills, and maybe even check with a few key retailers to see if they need more stock.
But what happens when precipitous events occur and there is no soft landing? What happens when talk of recession becomes one overnight, or a natural disaster happens, or there is a terrorist attack and talk of war? In an instant our autopilot shuts down and we are at the controls again. Do we know what to do? Probably not.
Every business, not just arts and crafts businesses, needs a crisis management plan to deal with an unpleasant change in its prospects for survival. I’m not talking about a rigorous, formal document here. It can be a simple as an outline on a sheet of paper. But the “worst case scenario” has to be the product of a thoughtful review of what makes the business work in the first place.
The crisis management plan is made up of several elements:
- Who are your key employees
- What are the elements of discretionary spending
- What are your changed credit and collection policies
- What is the minimum you need to take out of the business to live on
- How do you manage the cash flow that you are left with
Key employees. You need to identify which of your staff are necessary regardless of the level of business being generated. They may have irreplaceable skills or knowledge about your business. Losing such an employee would have immediate and severe repercussions for your business. These are the folks you want to keep on the payroll at all costs, so that your business can grow and prosper when conditions improve again, which they will.
Discretionary spending. You need to undertake a review of all classes of discretionary spending. This is not the time to be spending money that you don’t have. That new kiln can wait until you can see the future a little better than you can now. Don’t sign that expensive contract for new advertising. If you feel up to it, you might want to prioritize these: obvious cost reductions first, followed by those subject to a deeper cut if necessary, and finally a cut to the bone itself. Areas of spending you should examine carefully include:
- Defer all capital expenditures; these include machinery and equipment purchases, moving into a new space, etc. – any big spending that can be postponed should be
- Reduce inventory levels where you can, even if you have to have to pay more on a “per unit” basis; inventory represents money that you would otherwise put in the bank, and now is not a good time to be investing your working capital in more
- Examine your marketing budget; don’t produce that new catalog right now; don’t sign new advertising contracts, and review current ones to figure out which you can cancel with little or no penalty; take a hard look at the shows you have lined up – don’t assume that they are going to be as profitable as they have been in the past
- Review all expense items in your budget; do you really need that cell phone or company car
Credit and collections. You are going to be doing it to your suppliers, so you might as well understand and allow for it being done to you. That old saw about “…pay me so I can pay him so he can pay you…” is mostly true. You are going to have to set up a system to deal with partial payments, and steel yourself for some collection problems. You aren’t the only one being affected by this crisis, so don’t feel personally hurt when folks start paying you late. As long as there is dialogue and performance, don’t get too upset. Now more than ever is the time to spend managing your receivables.
Minimum “take.” Make a realistic assessment of what you need to take out of the business in order for you and your family to survive. Many of the elements of the “worst case scenario” you are developing for your business also apply to your private situation. Forget the new car or that vacation in Iceland. Focus on food and shelter. Hunker down and minimize your personal expenses.
Crisis cash management. Assume that there is not going to be enough cash to go around. You aren’t going to be paying all your bills on a normal thirty-day cycle. At least in the beginning months of crisis management, you are going to have to make some hard choices concerning who gets paid. Start by grouping your monthly expenses in three categories. The critical category consists of those expenses, which – if not paid on a current basis – would put you out of business immediately. They include:
- Rent or mortgage payments
- Telephone and fax lines
- Payments to shippers – UPS, Fedex, USPS, etc.
- Payroll taxes (I urge you to keep these current at whatever cost; the IRS is not sympathetic to your cash problems and looks at these funds as other people’s money in your trust)
- Bank loans and credit card payments (for these you might be able to negotiate an “interest only” payment for the duration)
The next category is for payments to preserve relationships. Sure, you can stiff your bead supplier and buy from his/her competition, but over the years you have built a special relationship with him/her. This probably translates into special treatment of your account or a premium level of service of some sort. Pay these folks after all critical expenses have been covered. If there is not enough money to cover all of them, then do a little analysis of this “nut” and figure out how much you can pay each month to these vendors. Contact them and set up a payment program. Dialogue is very important here. You will have a receptive and sympathetic ear – you’re all in the same boat.
The final category consists of generic expenses. These are not vendor specific. You can buy office supplies at a myriad places. Shipping and shop supplies also fall into this category. Pay these and like vendors only when money is available. Your credit report might take a hit by having to do this, but rest assured yours is not the only one taking on a little tarnish during this time.