Economic Dark Clouds and Your Business

Tim Berry, Entrepreneur and Founder of Palo Alto Software, bplans.com and Borland InternationalEditor’s note: Our latest expert to join in here at Small Business Trends is Tim Berry, a name that many of you who have written business plans will  recognize. Tim brings a “been there, done that” experience to his writings that I know you will find valuable.

By Tim Berry

As I climb up into the morning, coffee brewing, today’s headlines in the New York Times remind me of thoseStorms on horizon darkening late Spring afternoons in South Bend, Indiana, when what had seemed like a warm sunny day would suddenly cloud over and the Midwest veterans knew to take cover. I was a California kid, 35 years ago when I first survived the Midwest, I’d have visions of the Wizard of Oz and do nothing and end up soaked.

Seriously, the economic news is clustering now. As I write this, Today’s NYTimes has “4-Year Growth in Jobs Ends” and “Dow Drops 200″ combined into one story. That headline will change as the DOW changes, I assume, but these days it seems it’s likely to go down. We also have Rate of Home Foreclosures Hits Record and even what seems like good news — retail sales up — is just a silver lining.

Which brings me to the question of how all this affects you and your business. Gloomy headlinesIf you’re like me, trying to run your own business and unable, hard as you try, to not think of all of it in terms of your specific business, your sales, your employees, then the bad headlines take you very quickly to the unconscious analysis of what it means to you.

Which is very little, if you are like the vast majority of small businesses. With some notable exceptions, your business moves up and down far more because of very-micro specifics of what you and your team and your customers do. Your specific marketing programs, your new product release, your email campaign, your pay-per-click keyword decisions, your product development, your word of mouth … it’s what you do with your business that moves it up and down, not what happens in the headlines.

I’ve learned this the hard way, 20-some years now building the same company from zero to 40 employees without outside investment. In the beginning it was business planning services and for the last 13 years it’s been business plan software. Having had academic training as an analyst, I’ve always instinctively looked for the larger picture as a set of clues to my own specific small-business near-term future. When the economy turned down I’d brace myself for falling sales that didn’t happen. I’d explain that lack of correlation with some presumed macroeconomic puzzle piece, like people losing jobs were developing new businesses.

What was really happening, however, was very micro: new products, better marketing, channel development, whatever was working. And we had some nasty drop-offs too, due to micro-phenomena like changes in channel management and knock-off packaging in retail, and in one case the assumption that the market was ready for environmentally sensitive packaging that looked ugly. Then there was that time that I figured my customers were smart enough to recognize that $100 was only $0.05 more than $99.95, a stupid mistake that nearly killed our sales. Headlines have so little to do with it.

All small businesses live with the threat of some disaster or other. Not just the natural disaster like Hurricane Katrina in New Orleans, but the business disaster like the mortgage business coming apart for a while. Software companies live in the shadow of major operating system shifts, and the nightmare of Microsoft or Apple or Google or some new technology accidentally crushing you like an elephant crushing somebody without even knowing it. Think of the people who had data compression software, or fax software, or digital rights management, when Microsoft included these in the operating system for free. I had a good friend who built a chain of used CD stores just before Napster.

Not that small business doesn’t get caught in major economic shifts. Usually in those cases you know it before it gets into the headlines. Those of you caught in the mortgage crisis, for example: today’s NYTimes also has the story More Layoffs in Mortgage Industry; you knew that already. It looks like some startup investment funds from major venture capital and angel investors could get hit by this storm too, especially with the combined impact of proposed changes in tax treatment of some related interest income. There’s a lot of conjecture on this out there.

I’m not saying that the major macro-economic trends don’t threaten you. I’m just saying that your own microeconomic actions are so much more important. Six years ago venture capital was reeling after the dotcom crash, and the larger numbers and statistics showed it conclusively. Life was more difficult for both venture capital firms and the elite startups that depend on them. Some startups were postponed, some turned to other sources, and the vast majority of small business was unaffected.

Thoughtful economic analysis is readily available, fascinating, and scary. I don’t know about you, but for me some measure of future fear is a good thing. As president of a small company, being fearful is part of my job. Then I finish my coffee, go to my email, and get back to work.

-Tim

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About the Author: Tim Berry is president and founder of Palo Alto Software, founder of bplans.com, and co-founder of Borland International. He is also the author of books and software on business planning including Business Plan Pro and Hurdle: the Book on Business Planning; and a Stanford MBA. His main blogs are Planning, Startups, Stories and Up and Running.

24 Comments ▼

Tim Berry


Tim Berry Tim Berry is Founder and President of Palo Alto Software, Founder of bplans.com, and co-Founder of Borland International. He is a Stanford MBA, and principal author of Business Plan Pro. He blogs at Planning Startups Stories.

24 Reactions

  1. Yes, there are a number of micro-trends that are making things feel more than “partly-cloudy” (mortgage foreclosures, gas prices, wild stock market shifts) – perhaps all contributing to an impending recession of unknown depth and duration.

    Fear can be a healthy thing, if you don’t let it overwhelm you. We must be aware of the trends around us, but moreso of the things around us that we actually have direct control over. From a small business perspective, that means to step back from the day-to-day, seek help/counsel from qualified experts who can help you clarify your long-term business strategy. Only by understanding your strategy (and communicating it to the rest of your organization to make sure they understand it…) will you be able to set appropriate goals and have each person in the organization plan and align their daily activities to meet those goals.

    Perhaps I’m more optimistic than most, but having been through a number of economic highs and lows over the past several decades, I feel confident in understanding the impact of solid strategic planning and the impact it can have for small businesses struggling through tough times.

    Here’s to having a glass half-full, not half-empty!

    Skip

  2. Tim Berry

    Thanks Skip, I think we agree. I like to say that I’m supposed to be fearful, “that’s what they pay me for,” but it’s supposed to add awareness, not get in the way.

    Tim

  3. Anita Campbell

    I agree that success in your business has more to do with what you do in and with your business, than in the big macro-economic trends.

    On the other hand, I have found fear to be a great motivator, too. The trick is to harness the adrenaline that comes as a natural response to fear.

    Watching CNBC and hearing bearish reports sometimes gives me just enough of a wake-up call: “get busy, go out and do some selling, don’t be complacent.”

    – Anita

  4. Yvonne DiVita

    I find myself comparing this to the coming election. I’m past the half-century mark (but please don’t tell anyone – they all think I’m younger than that), and I honestly don’t see a change in behavior – despite dire economic predictions or long debates on who is going to run the country into the ground going forward.

    I’ve become more aware of what you’re talking about here – of economic indicators and economic change in the small business sector, and whether or not the Dems or Repubs are in Congress…but, again, none of it has much to do with me.

    I continue to operate on the basis that if I provide what my clients want and need, and can do so at a cost-level they can live with, I’m okay. I try to buy American. I try to shop close to home. I try to look at the world as a community and my area as a small neighborhood. In the end, the people are the only things that count.

    Whatever I can do to work with and enable the people I know and meet (online or off) is what drives my economic viewpoint. We all help each other, government and economists aside. (btw, I’ve struggled… mightily…and managed to rise above it all, by keeping my focus on the client…not on stories about the GNP.)

    Maybe that’s Pollyanna-ish, but, that’s me.

  5. If I was an employee, instead of an employer, I’d make sure I was doing everything in my power to help the organization succeed. Small business owners can actually make money if they use downturns as a reason to cut costs and become more efficient. If I am thinking about riding out a sluggish economy instead of agressive growth, I am going to have some positions that no longer need staffed.

    How small businesses think about growth and staffing are probably the most effected aspects by bad economic indicators.

  6. Great commonsense observations, Tim. This may be just a footnote to them, masterful as they are. But all decisions originate in people’s minds. In between the events of the day and any decision are two explanations or interpretations — the journalist’s and one’s own. Those who know what’s going to happen as a result of what happened are wrong. They’re wrong because it can’t be done. Those who don’t know what’s going to happen have an advantage. That advantage comes from the fact that they’re not applying mental models from the past to predict the future. Entrepreneurs (and by definition small business owners) don’t try to predict the future so much as make it. They need to be obsessed by controlling what they can, not being intimidated by a future they cannot predict. Business of any size is not algebra. There is no right answer. It’s not about right and wrong. It’s about creating something that didn’t exist before. It’s about making, not about being made. It’s about walking across the bridge while building it.

  7. I think following Andy Grove’s (of Intel fame) advice of “Only the Paranoid Survive” is a good practice. Complacency during the good times happens so easily, I think a leaders job is to continously look for reasons to be paranoid (fearful). Not to the point of becoming paralyzed but to the point of continous action to protect the company.

    Continuous Cognitive Dissonance, a new management mantra!

    Thanks for the great article Tim!

    P.S. So much of economic behavior stems from what we believe, if we believe it will get worse it probably will. If consumers believe it very probably will.

  8. Ramon Ray

    Joe Connolly, WCBS / WSJ small business reporter talks to a lot of small businesses. Several months ago he did a report that basically said small businesses are less affected by economic downturns and he’s right.

    Sure, an event like 9-11 where travel is shut down or severely restricted and where people are afraid makes EVERYONE suffer. But where mortgages are have trouble, banking and finance – there’s still so much of the economy that will do well. People still will need lawyers, still go to events, still need insurance, new computers, new logos designed, etc, etc, etc.

    So I think at the end of the day, with nothing REALLY, REALLY MAJOR most small businesses who are mature will do fine. Construction, landscaping and others. The gal who has been doing it for 5, 10 years, she’s likely to keep on going.

    Of course someone whose been in business for 6 months is going to struggle more than one who has been there 6 years…but overall mature small businesses will do just fine.

    Ramon Ray, Editor and Technology Evangelist, Smallbiztechnology.com

  9. Oddly enough – the timing could not be better for this post – because I am returning from facilitating a session today for the Women Presidents’ Organization Chicago chapter. Anita wrote about WPO Chicago earlier this month with an entry, “Women Business Owners Part of Social Entrepreneurship Trend” (http://www.smallbiztrends.com/category/social-entrepreneurship).

    The focus of our session, which comprised of 15 multi-million dollar women business owners, was on “MarketBusting: Strategies for Exceptional Business Growth” and based on a Harvard Business Review article (March 2005) co-authored by Rita Gunther McGrath and Ian C. MacMillan. Our reason for selecting this article was exactly in line with Tim’s theory. As business owners, we want to get ahead of what may appear to be an economic storm coming because we surely don’t want it to rain on our business parade. Even for folks who think there is no gloom and doom around the corner or maybe are just paranoid (and I’ve read former Intel founder Andy Grove’s book “Only The Paranoid Survive” – great book Steve!), we still need to perform beyond what the market is ready for.

    How are we going to do that you might ask? Why just look at social networking and social media! What a great example. But if you have a chance to read the MarketBusting article, you will find some really strong strategies and points on how to sell the outcome that a customer wants – a key to growing a business even during tough times.

    No. 1 is to identify your unit of business – the fundamental basis for transactions between buyers and sellers — (an example of a common unit of business: a consultant sells units of time (billable hours). No. 2 is to identify associated key metrics (an example might be total billable hours actually billed by the consultant, average hourly charges per employee, so forth).

    Where am I going with this? You have to constantly keep asking yourself after you address Nos. 1 & 2, “Does what I sell really reflect the value I create for customers?” Storm or no storm, paranoid or sane, cash or no cash, this is a fundamental question that must be addressed time and time again until you have it covered. And when your customers keep coming back, buying more and talking you up to others, you know you have achieved the right answer!

    Tim points out some remarkable facts and insights, yet I can’t help but think that we all, as business owners, must identify obstacles — whether real or imaginary – and get off our ‘you-know-what’ and change. And change involves doing something about it, not just reading or worrying about what’s next and am I going to make it sort of mentality. Based on everything I’ve said above, I totally agree with Ramon’s paraphrase of Joe Connolly’s comment that “small businesses are less affected by economic downturns.” It goes back to that get off your ‘you-know-what’ and change mantra. We’re ready. We’re workin’ it.

    What’s keeping you from changing to a new unit of business or from achieving higher performance on the key metrics associated with an existing unit of business? The weather? A report on the “Rate of Home Foreclosures Hits Record?” The NYTimes’ report of “4-Year Growth in Jobs Ends?” I doubt it.

  10. Joel Libava

    In my business, franchise consulting and marketing, the macro economic trends are something that I watch very closely. The past couple of years has seen some downsizings of workers, but a good amount of jobs available to them. My business has been affected by that trend. The amount of people contacting me, and being referred to me that want to explore opportunities in small business/franchise ownership opportunities has dropped significantly. That is going to start changing, however. Recent conversations I have had with outplacement counselors, all have one thing in common; A tightening job market. When the job market tightens up, and corporate downsizings continue, my e-mail box, and my phone receive bursts of energy. {My blogs, and websites, also}

    I predict that not only will people get downsized by their companies, and jobs become scarcer, but the US economy will be at the brink of a major recession, by the middle of next year. The mortgage crisis, and the continuation of high energy costs, and ridiculously high consumer debt will have caught up!

    Joel Libava
    The Franchise King Blog

  11. Tim, you raise several interesting points. Like you, I am of the opinion that small businesses are far more impacted by parochial market influences rather than macro level trends – at least over the 0 – 1 year time period. However, no savvy business owner should ignore the impact on customers’ expectations that the popular press creates when they print/broadcast doom and gloom forecasts. Your advice on “sticking to your knitting” is sound advice and will almost always mitigate most downside risk. In addition, utilizing dynamic pro-forma strategic modeling will always illustrate the effects of macro values on your business and assist in corrective action. Sounds to me like another good reason to buy your product.

  12. I had to look again to understand your comment Neal on “sounds to me like another good reason to buy your product.” I thought maybe you worked for Tim but … but I still think that only sticking to your knitting is a bad idea. It’s like putting all your eggs in one basket and if that basket blows up, as in the case of let’s say Joel’s franchise consulting business, then what? You can continue to nurture your core business but a diversification plan (either on paper or in your head) that you put into play early-on in anticipation of bad times ahead will carry you over to the other side where the rainbow lies.

    That’s why I mentioned the notion of “how to sell the outcome that a customer wants.” Oftentimes it’s not always through your core business (the knitting) but through diversification (the sweater, scarf, yarn, needles) that carries us through the rough patches.

  13. Tim Berry

    Hmmm … sticking to your knitting vs diversification … what I love about planning and small business is how often it’s paradoxical. You need to apply a strategy consistently and get back to work except for those times when you need to change it. It takes judgment to figure out which is which. I think you have a respectful watching antennas-up fear that doesn’t paralyze you, just gives you enough adrenalin to stay alert.

    Tim

  14. To paraphrase an old quote, “Small businesses don’t plan to fail; they simply fail to plan.”

    Strategic goals, operational plans and focus MUST be an essential part of the every day lives of small business owners. We cannot afford to hit the same potholes, get tied up in the same traffic jams or deal with the same detours as bigger companies. They have the resources to deal with delays and inconveniences. We don’t. One big pothole can put us out of business.

    We must be smarter, faster and more strategic if we want to survive. Economic downturns are inevitable. higher gas prices, lower consumer confidence, terror levels changing–all are a part of our daily lives. If we aren’t building these situations as well as potential threats in our specific industries into our plans, then we won’t be writing too many plans in the future!!

    As Sean Connery said to Kevin Costner while he lay dying in the movie The Untouchables, “What are you prepared to do NOW?”

    Small business owners must be keenly aware of their surroundings–how are current sales? What about future projections? What’s my contingency plan if (a), (b) or (c) happens? If new customers don’t come in, can I get more out of my existing customers? Are my marketing materials working? What if the unions at my largest supplier go on strike?

    Successful small business owners don’t panic when the world around them is crumbling. They keep their heads, figure out a way to survive and live to fight another day. Maybe they cut staff, pull back on expansion plans, go back to focusing on core products–until the economic climate changes, and then pull out their expansion plans again.

    Winners will ALWAYS find a way to win.

    Brian

  15. I think a healthy balance of watchful worry, planning, and action is what helps keep small business owners afloat no matter what the trends are showing at the macro level.

    I agree that we can impact our businesses the most at the micro level of attention. But we have to make sure we take a strategic approach to our businesses and be cautious not to get caught up in the domino effect of major economic shifts affecting our markets.

    To do that, we need to quit allowing ourselves to be jerked around by yesterday’s crisis and instead look to how we will solve our customers’ problems over the long term by being proactive in our businesses.

  16. Reviewed all the responses and have concluded that we need to setup an Advisory Board (how about a Wiki?) comprising of all of us.

    Great minds can accomplish great things. Let the good or bad times roll!

    Thanks Tim for a great post and to all of you for terrific perspectives.

  17. Brent Leary

    Tim,

    First off it was a pleasure meeting you at the ASBDC conference last week. And I really agree with you on this one. I think by the time the media announces some big macro-economic development small business folks will have already felt the main effects of it, if we are to feel anything at all. I’ve had some of the best opportunities come at some of the worst times for the overall economy, just as I’ve been negatively surprised with loss of business when the economy was supposedly humming right along. I keep an eye out on the macro developments but they seldom control how I operate my little business. I’ve got too many other things to worry about.

  18. Hi

    I enjoyed reading Tim’s column. Lately I have opted to call myself a very conservative Democrat teetering on being a very liberal Republican. With that said, I believe that the only growing businesses that are affected by the economy ( I do not use the adjective small in conjunction with business. Just taboo for me.) are those who are minority owned businesses, disadvantage businesses and the like. Those who are non minority contractors who are truly obtaining business contracts based on capacity, product and service are only affected by local economics and not the larger picture. Those affected by the larger picture, large businesses and minority contractors, etc., rely on the global economy to obtain large dollar contracts. Most minority owned businesses etc., then rely on these large dollar contracts while not really scouting for local business or local contracts from growing businesses like yours and mine.

    Thus when the national economy is slow, frazzled, and challenged, then so are their contracts. Then for these businesses the “real work of owning a business begins.”

    As a growing business, and a minority one who does not believe in minority set aside programs or contracts, I gage my business on the local economy surrounding Wisconsin and Illinois. What is going on in these states, their economics and politics will help me to plan my sales, marketing campaign and most important manage my existing customer base in order to retain revenues.

    Again, teetering between the two parties, only those who are interested in set asides are concerned about the national economy and how it will affect their revenues and minority contracts. Not really proving themselves beyond a certification process on what they can really bring to a client beyond a well written RFP and a satisfaction of being a part of a quota. Yes, this applies to all minority certifications, African American, Asian, Hispanic and Women!

    Those of us who do business the old fashion way, we actually depend on the value of our products and services when consulting with clients and future clients, will not be “as affected,” by national economics as long as we keep in mind we are serving clients and building relationships and not just obtaining contacts.

  19. Started a small restoration business after with less than good credit, just by “doing it”, and well. Then, it happend, a client stiffed me for 28,000.00. It has devistated my credit, I’m in great debt, still a business, but if I can not get financial aid, I am done. The economy is keeping peoples money in their pockets… Not helping me! Any idea where to start?

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