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Risk Factors

A checklist of potential trouble spots that seasoned CEOs are watching as they head into the new year.
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Managing

A checklist of potential trouble spots that seasoned CEOs are watching as they head into 2002

Ruth Owades knows a thing or two about growing a business during an economic downturn.

Owades, who has started, grown, and sold two catalog companies -- Gardener's Eden and Calyx & Corolla -- faced economic downturns not long after she launched each of her two businesses, the first in the late 1970s and the second in the late 1980s. The philosophy behind her success? "The essence of being an entrepreneur -- besides having a new, good idea -- is that you can be flexible and facile and move with the opportunities. It's part of the entrepreneur's job to figure out what those opportunities are," she says.

Still, opportunities aside, if you're going to thrive on uncertainty, you have to try to manage risks that could blindside you. Some of those dangers are obvious. For example, this is not the time to be short on cash or to be on shaky ground with your financiers.


COLLECTIONS SLOWDOWN: Tom Yantis offers incentives to customers to pay promptly.


But the art of surviving -- and thriving -- in a time of economic turbulence involves more than the obvious. To help us identify some problems to look out for, we asked some seasoned executives at entrepreneurial companies -- folks whose companies have weathered everything from past national recessions to regional or industry-specific downturns -- to name the business variables that they think are particularly worth tracking in today's economy.

What are your customers' plans -- and how are they changing?
Russ Teubner, who sold his Inc 500 software company in 1997, is now the founder and CEO of HostBridge Technology Inc., a start-up in Stillwater, Okla., that targets mainly big-company prospects. And, he says, "large corporations have the capital budgets screwed down really tight" right now. Teubner, whose company's software integrates mainframe and Web applications, found that changing his pricing structure boosted interest among potential customers. He no longer offers only unlimited use of his software but now also lets customers try out the product for a limited use -- and a smaller initial fee. "You really have to focus on customers' economic models and what is motivating them," Teubner says.

What's the average age of your accounts receivable -- and is it changing?
Tom Yantis, president of Yantis Co., a construction company in San Antonio, has learned to speed up collections when the economy falters.

After the company's receivables began slowing at the end of the summer, Yantis Co., which had close to $40 million in fiscal 2001 sales, began offering incentives -- such as some additional services gratis -- to its customers if they paid up promptly. One tip: Yantis has found that such discounts are effective only when they are directed at a decision maker -- such as a project manager -- rather than at an accounts-payable clerk, for instance.

In general, Yantis tries to make sure that his invoices don't languish; the company faxes (or, in some cases, E-mails) invoices to the person who must approve them and then follows up with a reminder five days later.

Can you diversify your customer base?
One key recession-fighting technique Yantis Co. has learned over the years is customer diversification. The company maintains a mix of public- and private-sector work -- on the theory that government work tends to be low margin yet pretty recession-proof. During the boom years of the late 1990s, the public-sector work that Yantis Co. did dropped at times to as low as 10% of total sales, Yantis says. By the fall of 2001, the company's public-sector-work backlog was close to 35%.

Do you need to vary your supplier mix?
Palmer Reynolds, owner and CEO of Phoenix Textile Corp., a company based in St. Louis that provides textiles and design services to the health-care industry, is keeping a close eye on her sources of supply -- many textiles are now manufactured in Pakistan, India, and Bangladesh. "You have to be aware. You have to be smart. You have to make sure that you have many areas of procurement," says Reynolds, whose company expected sales of about $50 million for the fiscal year that ended October 31.

Could changes in fuel and transportation costs have an impact on your business?
Another area that affects Reynolds, whose products are distributed by truck, is rising fuel costs. "I paid $65,000 more in fuel charges" this past year, she says.

How dependent is your business on the movement of goods across international borders?
Kappler Safety Group Inc., a manufacturer of protective clothing in Guntersville, Ala., projects 2001 revenues of about $100 million. In the wake of the tragedy of September 11, "we're going to see some fairly aggressive buying" of high-end protective gear, says Mike Willis, chief operating officer for the company. But with 80% of the company's revenues involving some international aspect, such as product assembly in another country, Willis is now wondering how heightened security -- and thus delays -- at U.S. borders may affect Kappler's production and therefore its cash flow.

If exchange rates fluctuate greatly, how will that affect your company?
Rick Heiniger, CEO and founder of RHS Inc., an $18-million maker of specialized agricultural-equipment accessories, says about 30% of his company's sales are made to foreign customers; Australia and Canada are RHS's biggest markets. Heiniger, whose company is based in Hiawatha, Kans., keeps close tabs on exchange rates, which have an impact on his business in two ways: if the dollar rises or falls, his company's overseas sales are affected -- as are the sales of his domestic customers who export.

What do your sales patterns and marketing response rates reveal?
In any consumer business, consumer confidence is an important indicator to watch. Owades says that there are several key variables to track in a direct-marketing company: average order size, purchase frequency, and response rate to E-mail-marketing or direct-mail initiatives. "Be very sensitive to all of those numbers," Owades advises. If any of them are declining, she notes, a smart company adjusts its expenses accordingly, while also thinking up creative promotions to bring in business, even if it's at lower margins.

Martha E. Mangelsdorf is a freelance business writer and editor.


Copyright © 2001 Martha E. Mangelsdorf.


The Whole New Business Catalog

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The 24-Hour Recovery Plan
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'Strap on Your Helmets'
Payday


Please e-mail your comments to editors@inc.com.

Last updated: Dec 1, 2001




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