Good Advice for Bad Times

As everyone is painfully aware, the U.S. economy has slowed significantly in recent months. If you earn your living selling design services to corporate clients, you already know that many of them are cutting back existing budgets and delaying the start of new initiatives. When the economy enters a recession, the first client industries to be affected are usually the ones most dependent upon consumer discretionary spending, including such things as:

• Travel and tourism
• Furniture
• Major appliances
• Automobiles
• Home financing
• Residential construction

As a businessperson, it's important for you to start battening down the hatches and doing some contingency planning-particularly if your clients are in these vulnerable categories.

What can you do to keep your design business healthy during an economic downturn? Here are six smart strategies to help you cope.

1. Get back to basics

For your design firm to thrive over the long haul, you need to be doing work that draws upon your key strengths and produces profits. Sit down and review your current mix of clients and services. Pay close attention to which ones are producing profits for you and which ones are not. If you've slowly expanded into marginal activities, now is the time to pull the plug on them. You can't be everything to everybody-it's important to stay focused on your core competencies. Reducing an overly broad range of services and products will allow you to focus on the strongest. It also leads to more effective positioning and differentiation. This brings us to our second topic…

2. Pump up new business development

You need to increase sluggish sales by landing new clients and projects. However, you don't want just any work-it has to be the right kind. Again, concentrate on your strengths. Don't panic and try to take on anything for anybody. That would water down your brand and take you into areas where your firm is less competitive (and probably less competent).

To help with your new business efforts, review your promotional tools and activities. Make sure that you have these key items:

• Updated case studies that can be added to proposal packets
• A compelling website with fresh content
• A new postcard ready for mailing to potential clients

Beyond these, consider adding some additional components to your promotional mix, such as:

• Participating in client industry events as a panelist or speaker
• Placing ads in key trade publications within client industries
• Buying new mailing lists to reach additional decision makers

Do some research into current industry trends and focus on client categories that have the most potential. Your goal in all this is to be a leading provider of premium services in strong demand within client industries that are expanding.

At the same time, of course, you want to nurture ongoing relationships with the best of your existing clients. Networking is always important, and it's perfectly acceptable to ask for business referrals and testimonials that you can use for marketing purposes.

As you begin to close in on potential projects and negotiate fixed-fee proposals, don't let new clients center their negotiations on hourly rates. Allowing a client to hammer down the hourly rate that you use for developing project budgets will quickly drain away your profitability as well as your self-esteem. Instead, negotiate the scope of work. Reducing the overall quantity of work that needs to be performed is the best way to reduce the overall price tag.

One last thought about new business development: Landing new design work is not like turning on a tap. For some types of projects, you should expect a long sell cycle. It may take quite a while to go through the pitch process, submit a detailed proposal, and get a signed contract back. While you're waiting, you would do well to heed this next bit of advice…

3. Cut labor costs

A slump in sales must trigger a prompt reduction of expenses. Where should you start? Look at the big-ticket items first. In design firms, labor is by far the largest business expense. If you don't have enough work to keep everyone busy, immediately release any freelancers you're using. Then, if there's not enough work to keep your regular employees productive, consider trimming the workweek and prorating compensation accordingly. For example: Cutting back the workweek from five days to four represents a 20 percent reduction in payroll costs. This change is a temporary measure only. If payroll continues to be too high for you to cover, the next step has to involve permanent layoffs.

Think carefully before you act. In order to do the right thing, plan out the most likely scenarios for the company: How low will the workload go, and when is it likely to pick up again? When you scale down, it's important to retain key skills that are necessary for the success of your client projects. Layoffs should eliminate duplicate positions and any that are easily replaceable. Maintaining an appropriate foundation of skills makes it much easier for the company to scale back up when business conditions improve.

The decision to lay people off is a very tough one, but you can't afford to wait too long. When you're ready, the wisest approach is to cut once and cut deep. This is much better than laying people off one at a time, days or weeks apart. That's very demoralizing to the staff and creates growing paranoia. To soften the blow for employees who are asked to leave, you should provide career advice, letters of recommendation, and perhaps even introductions to other firms. At the same time, reassure employees who are staying by meeting with them and keeping them informed. Morale is going to take a hit because people can't help feeling insecure. However, don't let morale get so low that it has a negative impact on the quality of your work and the level of your client service.

When you do eventually staff back up, hire cautiously. You'll be older and wiser for having gone through this painful process. As a businessperson, you'll know that you have to keep payroll affordable by not overstaffing and not allowing base salaries to become inflated. On top of reasonable base salaries, you'll learn to motivate team members with incentives that are directly tied to the company reaching specific business goals. In this way, a certain portion of your future labor expenses will flex in response to changing conditions.

4. Cut other costs

We've been discussing labor, but of course payroll is not the entire financial picture. You have many other business expenses as well.

Some of them are directly related to active projects. Be sure that you budget and track all project costs tightly, that all of them can be billed back to the client, and that your invoices include full markups.

Next, sort through non-project costs in order to establish clear priorities. Chances are you'll find some overhead expenses that can be eliminated entirely, including such non-essentials as fresh flowers or free food in the refrigerator. For things that can't be eliminated outright, think of ways to reduce them.

One unavoidable expense that can be quite high for design firms is the cost of the physical space your company occupies. It may be possible to get creative about this. Depending on the size of your firm and the layout of the building you're in, you might be able to consolidate your activities in order to occupy less space. You may be able to release an unused section back to your landlord or negotiate a temporary sublet to another firm (if your master lease allows you to have subtenants).

5. Manage cash

Even in good times, many design firms have trouble with cash flow. It's an even bigger challenge when business is bad. With any luck, you built up some reserves in the past. They will be helpful now when you're on deadline to pay such things as rent and taxes.

To maintain financial health in tough times, it's important that you don't operate in the dark. Prepare a detailed cash flow projection on a weekly basis. You need to anticipate when funds will be coming in and plan exactly how they will be used.

Most of your incoming cash is from clients, so here are some tips regarding project invoices:

• Bill often
  A series of moderately-sized progress billings will help to smooth out your cash flow -- don't wait and send one big invoice after the project is over.
• Bill effectively
  Include complete data on every invoice to make it self-explanatory and easy for the client to process.
• Follow up on open invoices
  Send month-end statements, provide additional invoice copies, and make friendly personal phone calls to check on payment status.
• Collect the full amount
  Negotiate your fee up front, lock it in with a signed contract, deliver good work, then stick to your guns. It's not ethical for clients to try to renegotiate pricing after the work is already done.

As you land new clients, run credit checks and set appropriate limits on the amount of credit you extend. Best case, you'll have clients across a range of industries. If clients in a particular industry are facing temporary cash flow problems of their own, the fact that you have clients in other categories will help you to offset that fluctuation.

If money problems are keeping you up at night and you've already taken the measures that we discussed above, then your next step might be to negotiate an across-the-board cut in all staff pay rates. At the same time, defer compensation for yourself and any other owners. Don't take a check at all for the next few pay periods. You can slowly get caught up as future conditions allow.

At this point, you've stretched existing cash from operations just about as far as it can possibly go. The only remaining step is to find entirely new sources of funds. For example: To free up cash, companies sometimes sell assets such as extra equipment or furniture that's not being used. Design firms sometimes have the option of liquidating works of fine art, such as a print collection or rare poster collection. It might also be possible for owners to make an additional investment in the firm, providing a cash infusion from their own personal resources.

A word of caution: When you're looking for sources of additional cash, don't give in to the temptation to take out new loans. If conditions don't improve, the company might not be able to repay them. In fact, banks are reluctant to extend credit to small businesses in the current climate. Credit lines and other types of loans for small businesses are subject to tighter underwriting standards and, at many banks, higher interest rates than they were just a year ago.

6. Rethink

As the old saying goes, a crisis is an opportunity misunderstood. Perhaps it's best for you to look at this entire situation in another way-it may be a strategic opportunity for you to rethink and reposition your firm. After layoffs and cost cutting have made you leaner and meaner, it's much easier for you to grow in a new direction. Use this downturn to make changes and improvements-to fine-tune your internal systems, rethink your services and resources, even reposition or restructure your firm entirely. By doing this, you'll be prepared to benefit when the economy begins to expand again.

Lessons learned

Remember that this downturn is temporary. It's part of a natural cycle. When you're back at the top, remember the hard lessons you've learned: Build reserves, diversify clients, run credit checks and set limits, hire cautiously, constantly update projections, and watch those business trends!