Watch for stories about Japanese banks. They're pulling back on loans and investments in the United States to cover huge speculative losses at home. Any abrupt dumping of their U.S. assets, including U.S. Treasury debt, will spell credit trouble for small businesses.
Most depressions are international in scope, so in that sense any good economic news from Europe and the Far East is good news for the United States. Watch for gross-domestic-product (GDP) and stock-market news from major European cities and Tokyo. Falling output and prices there are not good signs here.
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Check Your Assumptions
It is dangerous to assume that what has been true in the past will remain true in the future, which means that nothing you currently do as a business owner or manager should go unexamined. Ask questions:
How much inventory do we carry? Why?
What's our policy on receivables? Why?
What makes a customer creditworthy? Why?
What are the terms and length of our current contracts with suppliers? With customers? What terms might we want to adjust? Where is there room for adjustment? Where is there not?
How do we compensate production workers, staff, and salespeople? Why?
Are we locked into a fringe-benefits package?
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Lighten Up
If a business owner thinks, as I do, that some chance of deflationary economic shrinkage exists -- whatever the nature of the storm that brings it -- there are hedging steps to be taken. They involve capital expenditures, real estate, debt structure, inventory, compensation, and work force. The general rules would be these: (1) don't buy what you can't pay cash for, and (2) avoid commitments that lock you in. Here are some specifics:
Lease, don't own. Plants, equipment, office machines, vehicles, and real estate are all assets whose prices could plummet and do serious damage to your balance sheet. Besides, in a serious downturn you may not even need all of them. If you need some now, get them on a short-term lease. If you own them now, see if you can sell and lease them back.
Shed debt. Any new debt or debt you currently owe will only get more expensive with deflation. You'll be paying it off with dollars that are worth more than those you borrowed. New debt won't be a problem if you lease instead of own, provided you can get out of the lease. Existing debt you should try to get rid of. If I owned a small business right now, I'd think about cutting my salary and using the savings to pay down long-term loans. I'd think about raising equity -- from friends, family, a partner who wasn't looking for an active role -- and using it to reduce the company's debt load. Bankers can and will call most business loans during a crisis, so I would consider converting unsecured business debt to a personal home-equity loan, which offers greater stability.
Shed people. Some portion of any company's employees are superstars -- they're worth more than they're paid. Another group probably just earn their wages. And a third group you keep because, when averaged with everyone else, they get the job done. It's difficult and sometimes unpleasant to bother finding out which employees belong in which group. Take the trouble, then make sure you keep the first group as employees. Consider converting the second into contract labor so you won't be stuck paying for their increasingly expensive benefits and automatically escalating wages. The bottom third you probably don't need. Productivity is survival in a deflationary, no-growth economy. That means wringing the best from the brightest, who will respond to incentive-based compensation. Contract labor gives companies flexibility to respond quickly to changing demand. And people who aren't adding value to the company's product or service that is at least equivalent to what they're paid have no place in the organization, anyway.
Examine contracts. If a long-term agreement locks your customer into a price, that's good; if it locks you into a price with a vendor, that's not good.
On the cusp of the 21st century, old-fashioned conservatism -- save your money, and don't buy what you can't afford -- has a lot of appeal.
But what if I'm wrong? What if the 1990s turn into a decade of more of the same -- solid growth with mild inflation? If I'm wrong and you've taken my advice anyway, I'll still be relieved. On the one hand, you will have been holding back when you should have been reaching, so your company's sales won't be as big or your market share as large as if you had vigorously pursued growth. On the other hand, even if I'm wrong and you've missed some growth, your company's profit margins will have improved with the productivity gains you've made, and -- more to the point -- you will still have a company. That won't be the case if I'm right and you've continued along the old course, doing those things that used to make sense.
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Eric Kriss is the former CEO of Medi-Vision, a 1989 Inc. 500 company. He has devoted the past two years to the public sector as chief financial officer of the Commonwealth of Massachusetts. To voice your opinion on this piece, you may write Kriss care of Inc. , 38 Commercial Wharf, Boston, MA 02110; fax him at 617-248-8090; or call 617-248-8111 to record your comments.
