A Time for Leadership
Let me begin by just telling the story.
My business sits on the Brooklyn side of New York City's East River and has a view of the Manhattan skyline. Until Tuesday, September 11, that skyline included the twin towers of the World Trade Center. Sometime around 8:55 that morning, my company's president, Louis Weiner, glanced up from his desk and noticed smoke billowing out of one of the towers. When he looked closer, he could see a large, gaping hole in the side of the building.
He called out to the people in the office, who joined him at the window. Outside the building, other employees gathered and stared at the sight. There were two or three dozen of them watching when the second airliner flew into the other tower and exploded.
At that moment my wife, Elaine, and I were sitting in a plane at JFK International Airport, getting ready to depart for Los Angeles. As soon as we heard about the disaster, we got off and headed back to the company, where Louis was trying to deal with the growing sense of panic among our employees, many of whom had friends working at the World Trade Center. I talked with him by phone after the first tower collapsed, and we decided that he should call everybody together and tell people they could go home immediately if they wanted to.
There was no space inside the building large enough to hold all the people who work at the warehouse, so Louis had them go out to the street that runs alongside the main building and ends at the East River. He was standing there with his back to Manhattan, addressing the assembled employees, when they suddenly gasped and started to scream and cry. Louis turned around. The second tower was crumbling. He turned back to the employees. "We're going to close for the day," he said. "You can stay here if you don't have anyplace to go. If you do have somewhere to go, you can leave whenever you like." People were running down the street when Elaine and I pulled up to the building.
When tragedy strikes, priorities change, as we all discovered on September 11. At my company and at countless others around the country, business issues suddenly took a back seat to other concerns. Waves of emotion swept over all of us as we struggled to grasp what had happened and how our lives had changed.
It will be a long time before we know the full extent of the damage inflicted by the airplane hijackers, but I'm already concerned that the economic toll may be greater than it has to be. Disasters of this magnitude -- whether they're natural or man-made -- affect companies in ways that aren't always immediately apparent. As a result, some companies could be in trouble right now, and their owners might not realize it.
Consider a guy who owns a $5-million delivery business in New York City and has lost 20% of his sales. Some of his customers aren't around anymore, while others have cut back because they've lost their customers. So the likelihood is that the company's sales for the next year will be down by at least $1 million. If the company has an average gross margin of 50%, the drop in sales means that the annual contribution to overhead will be $500,000 less than planned. Let's say that the owner had expected to earn $100,000 in pretax profit for the year. Now, just to break even, he would have to reduce overhead by $400,000.
By acting quickly, the owner can minimize the damage. If he has a full year to cut $400,000, he needs to reduce his overhead by $33,333 a month, which may not be easy but sure beats the alternative. The longer he waits, moreover, the more drastic the cuts will have to be. If he waits too long, cuts alone may not be enough to save him. He could suddenly find himself in Chapter 11 -- or worse.
That's more or less what happened to me in the late 1980s. When the stock market plunged in October 1987, my delivery business lost 50% of its sales overnight. I told myself that the market would recover and the sales would return, so I didn't cut back as much as I should have. By the time I realized how dire my situation was, events had overtaken me. I filed for Chapter 11 in September 1988.
To be sure, there were other factors that contributed to my downfall, as I've noted before. (See " Groundhog Day," July 2001.) But it's very easy to stumble into the same trap I wound up in, and I'm afraid that a lot of companies may be headed for it at this moment.
The problem is partly psychological. Most entrepreneurs are, like me, optimists by nature. They're also patriotic, and they may feel that if they cut back now, the terrorists have won, although I disagree. The terrorists win only if they put you out of business.
Psychology aside, a business owner may not realize what's happening. Take the guy with the delivery company who's doing 20% less business following the attacks. Because his direct costs are down, he has fewer bills to pay. Meanwhile, he's collecting on the accounts receivable he sent out before the downturn, so his cash balance might actually go up. Unless he's carefully tracking his numbers, he may not see the danger he's in. As far as he can tell, business is just a little slow. Meanwhile, he hears Alan Greenspan urging Congress to put off action on a recovery package until we have a clearer picture of the disaster's economic impact, and so the delivery guy figures he can wait, too. But in business, waiting is a very bad idea. For the first few months after a disaster, it may seem as though your company is doing OK. Then in the fifth or sixth month, you could find that you can't pay your bills.
So how do you avoid that fate? There are actually two things you should do right away if you haven't done them already.
First, you need to look at your cash flow over the next 90 days and determine how it will be affected by the crisis. If you know your cash needs, you can usually find ways to take care of them. You can call vendors and tell them you have to pay more slowly than usual for the next couple of months. You can call unaffected customers and ask them to speed up their payments. You can talk with your banker about extending your credit line. There may also be government programs you're eligible for.
The second step you need to take is more difficult than the first. You have to make a clear-eyed assessment of the disaster's impact on your business over the next year. That means going through your customer list and making your best guess about the amount of sales you think you'll lose.
In coming up with your estimate, it's wise to err on the side of caution. At times like these, we all have to guard against overoptimism. Listen to the more conservative people around you and prepare for the worst-case scenario. Cutting a little too much is better than cutting much too little.
That said, it's also important to bear in mind that recessions end. You don't want to do so much cutting that you miss the next upswing. In particular, I'd avoid cutting people if possible -- for business reasons as well as humanitarian ones. Layoffs can do serious, long-term damage to a company's culture. Sometimes they're necessary, but I believe they should always be a last resort. Think first about freezing salaries, eliminating perks, not replacing old equipment, and so on. Your employees will understand and support you if you're trying to save jobs. And if it turns out you can't save jobs without laying some people off, don't allow the process to drag on. Make all the necessary cuts at the same time, and then let the remaining employees know their jobs are secure. You will destroy morale if everybody is wondering who will be the next to go.
Aside from minimizing job cuts, I'd also avoid cutting back on selling and marketing. In fact, I'd figure out how to do more of both. As I've explained in this space before, I believe that companies should expand their sales-and-marketing efforts during a recession, even if that means taking money from other areas of the business.
And one last piece of advice: if you're the owner of your business, now is the time to take charge. I generally let my managers run my companies, but I've made the key decisions since September 11, and I've gone out of my way to be more visible to employees. I want them to know that we're doing what's necessary to get through this crisis and come back stronger than ever. The terrorists may have left a gaping hole in the skyline across the river, but we're going to make sure that when the final toll is tallied, we won't be included among their victims.
Norm Brodsky is a veteran entrepreneur whose six businesses include an Inc 100 company and a three-time Inc 500 company. This column was coauthored by Bo Burlingham. Previous Street Smarts columns are available online at www.inc.com/incmagazine/columns/streetsmarts.
Please e-mail your comments to firstname.lastname@example.org.
NORM BRODSKY | Columnist
Street Smarts columnist and senior contributing editor Norm Brodsky is a veteran entrepreneur who has founded and expanded six businesses.