Special Report: State of the Entrepreneurial Economy
Reports from the Inc 500: Managing in the fast lane, surviving in the oncoming lane.
SALT LAKE CITY: At a semiconductor programmer that's fallen short on cash, the CEO takes an enormous pay cut, lays off employees, and turns to his bankers for help.
Eric Jenkins, founder and CEO of Teklution, says things started to fall apart in October 2000 and have only gotten worse. "We were shocked by how quickly the downturn hit us, since we were on a growth path," he says. Teklution, which programs semiconductors, recorded revenues of $7 million last year, "but this year we're down to $5 million," says Jenkins. Since October 2000 he has been forced to lay off 90 people. He himself took a 50% pay cut.
"We're struggling," he says. "We've been in negative cash flow for a few months. Six months without profit. We've been out there aggressively pursuing new business, but there doesn't seem to be business out there. Our sales have stabilized -- been flat -- but we took such a severe beating that we're digging ourselves out of a hole. We're very leveraged debt-wise with multiple banks."
So far his bankers have been patient. "They tell me they have many loans in default. They're willing to work with us to try to help us make it. It's in their best interest."
AUSTIN: A government contractor poised for expansion reverses course suddenly as state tax revenues plummet.
Allen Johnson's $1.5-million company, RAS Group, provides staffing, training, and consulting services. More than half of his customers are state of Texas agencies. The state's last fiscal year ended on August 31, and that's when its government contracts expired. "Normally, the state is pretty immune" to economic cycles, Johnson says. But this year sales-tax revenues were down, and eight of his nine government customers slashed their budgets and failed to renew their contracts.
Early last year Johnson took out some bank loans with an eye toward expansion. But when the economy began softening, he cut the staff from 20 to 11, and some of those left behind were forced to cut their hours from 40 to 30 a week. Now Johnson still has those loans, and he can't get any more financing. He and his partner cut their own pay to "negligible amounts," he says. The company is sitting on large bills. The worst-case scenario, the CEO says, is not making payroll.
Johnson has been out pounding the pavement looking for partnerships. He's struck a deal to resell courses from an E-learning company. He wants to line up at least $50,000 in new work so his bank will give him some more cash. Then he could tell his bankers, "Look, we can see light at the end of the tunnel."
"We were suffering well before September 11. Even though my business is not a dot-com, we were dealing a lot with dot-com businesses. And my clients are doing business with dot-coms. My customers' cash-flow problems get passed on to me. Customers are asking us to reduce our margins or they will take their business somewhere else. Business is down at least 50%. How have I responded? In addition to praying? We have reduced expenses as much as possible. We used to have Cokes and drinks in the fridge; now we've turned the fridge off. Our workforce has gone down by at least half, and everybody is spending as much time in sales and marketing as possible, trying to find work wherever we can."
PORTLAND, OREG.: A seller of chai benefits from consumers' continuing demand for low-cost luxuries.
Heather Howitt, president and CEO of Oregon Chai, is not particularly concerned about the economic downturn. Her company's sales have continued to grow at a double-digit rate, Howitt says coyly, since the company landed on last year's Inc 500 list, with sales of $11 million. Oregon Chai's steady expansion can be explained by the fact that it operates in a consumer-products niche that provides safe harbor while other businesses face declining sales and crunched cash flow.
What if her sales suddenly slide? Like many CEOs, Howitt will watch her advertising spending. This year she saved much of her ad budget for the fourth quarter for strategic reasons. Ads that run during the summer months never seemed to work; chai, a beverage served warm, is simply out of season.
Howitt plans to run ads throughout the fall, but she figures that if sales begin to drag, she can reduce advertising costs instantly, dropping consumer ads while keeping her schedule with the print trade journals.
There are areas in her business where she is already trimming the budget. For example, she'd heard that attendance at the Natural Products Expo East would be down by half, so she cut the Oregon Chai contingent from 10 to 2. "Whenever there's an opportunity not to spend, we'll take it," she says. The surprise ending: the conference was packed.
LAKEVILLE, MINN.: A manufacturer of snowmobile parts suffers a 25% decline in revenues.
Contract manufacturer QA1 Precision Products makes parts for off-road vehicles like snowmobiles. Its revenues dropped suddenly last year when the company lost one large contract. No matter, says CEO Jim Jordan, QA1 is adaptable and expanding. He's trimming away the marginally profitable parts-broker work and ramping up private-label production for his cost-conscious U.S. customers. He figures that those manufacturers will need to use his affordable overseas factories to keep their prices low. "When things get tight and profits get squeezed, midsize and large U.S. companies tend to look more at cost savings," he says. Thus, the company has been on a building binge -- it just constructed the first of four planned factories in China. Jordan plans to grow his staff by 15% to 20% next year.
He can't completely hide his concerns, however. He managed another company through the last recession and finds this one much harder to call. "We're selling discretionary purchase items. Some manufacturers have cut back their build cycles, but the unemployment figures do not reflect that type of decrease," he says. "No one knows what's going on in the consumer's mind."
CHANTILLY, VA.: A direct-mail company located not far from the Pentagon prays for a good holiday season but steels itself for the worst.
For months now Rich McElaney, CEO of Micromarketing, has been doing his usual "mall trolls" at Tyson's Corner Center in Virginia, looking for signs of consumer confidence. A good holiday shopping season could catapult his company's performance to a higher level next year. A bad season could bring down the curtain if he's not prepared.
The company has already gone through a downturn dress rehearsal of sorts. The 12-person business helps retailers prepare targeted mailings to acquire new customers. Late last year one of its largest retail customers filed for bankruptcy. "That was a shock. They were paying on time," says McElaney. A $1-million account that contributed 25% of the company's revenues was gone forever. "You get a few large accounts and you get caught up in serving them," he says. "It's the bane of any small company."
Now the company's second act depends on how fast Micromarketing can diversify its client base. Despite the uncertain mood in retail -- "I expect some clients to go down the road of our ex-client," says McElaney -- he is gearing up for 10% to 30% growth in 2002. "There's a certain amount of defiance in our numbers," he admits. "We're not going to bend. We're the most entrepreneurial country on the planet."
At press time the CEO was securing the $3-million company's first line of credit. A large bank and a community bank weren't just vying for his business, "they were bending over backward" for it, says McElaney. "The conversation didn't change after September 11," he says. "Most banks want our kind of company with proven cash flow."
"We started this year with strong profit margins, but they've simply been shrinking. I spent this weekend running 12 different scenarios with my finance guys. How do we extend our runway so that we're still in business when this thing turns around? There are only so many costs you can cut. There's no silver bullet -- there's a rusty bullet. Hopefully -- and I say that with a capital H -- things will pick up by Q3 or Q4 of next year. We're in a fight for survival."
DALLAS: A human-resources-management company contributes to the ripple effect.
PeopleSolutions has done an about-face in more than one way. The $7-million outsourced-HR company has virtually stopped recruiting for its clients. And staffers now perform services the company used to outsource itself. How's that for a reversal of trends? CEO Ed Rankin says he had no choice but to change course. The company derives 70% of its revenues from 10 clients, and "they've pretty much stopped spending money," he says. Since last spring, Rankin has pared his workforce by 60%, to 20 employees. With a smaller company, he doesn't need as much outside help. So functions like IT support have come back in house.
SAN CLEMENTE, CALIF.: An unprofitable presentation-equipment dealer hires aggressive salespeople.
Art Feierman's company, Presenting Solutions, sells conference-room gear. Following an extremely tough third quarter, "we are, at the moment, unprofitable for the year," he says. "I find that depressing."
The terrorist attacks were tough on an already lagging convention industry. No one bought a thing during the next couple of weeks. Feierman's strategy: cut costs and sell hard. He fired three unproductive salespeople, hired three go-getters, and planned to hire two more. By October things were looking up: he'd inked a few big partnership deals that will generate revenues in 2002.
Still, Feierman would welcome government help -- specifically, low-interest loans. "I would much rather borrow money from the government than use my bank lines," he says.
GERMANTOWN,TENN.: A thrifty chief executive of an Internet logistics company welcomes the chance to become even more efficient.
Mason Kauffman is a conservative guy in more ways than one. Some are obvious -- white shirts and ties are the uniform of the day at his Internet company, Accuship -- and some are subtle. Kauffman, a FedEx veteran, says he welcomes lean times because of the management discipline they demand. "At FedEx we'd always have belt-tightening at the end of each fiscal year, and that was always a good thing," he says.
Kauffman brought that cost-conscious, buttoned-down management style with him to Accuship. "We've always operated as though we were a public company, with hard monthly closes and reporting stockholder equity," he says. Today the CEO is urging his employees to become as productive as possible at the least cost -- for instance, by holding Web-based conferences instead of traveling. Most important, he's seeking efficiencies in closing sales, despite the fact that sales are up 100% this year, to $6 million. No way is Kauffman letting world events get him down. "Tell those terrorists they've forced us into more productive ways of doing business," he says.
See also " Cloudy With a Chance of Monsoons," which is part of this Special Report: State of the Entrepreneurial Economy.
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