From Bad Times to Worse for Small Business

According to this blog I site regularly:

- Business bankruptcies have tripled since the first quarter of 2006
- Nearly 29,000 companies filed for bankruptcy in the first half of 2008
- Given an estimate that as few as 1/3 of "deaths" go through bankruptcy, it is estimated that up to 90,000 businesses failed during the first half of 2008.

"The vast majority of these failed companies are among the nation's 23 million small businesses, with fewer than 100 employees.", according to recent analysis from McClatchy.

These failures are a primary force driving unemployment higher. The article makes the point that the BLS is under counting failures while over counting new business establishments. Regardless, the "death" statistics are very scary, especially for the small business community, and reinforce the need to hunker down, save some capital, and cut remaining fat to keep the business going.

Open Source Solutions to Your Challenges

The recent article in the NY Times Science section entitled If You Have a Problem, Ask Everyone, describes how companies are using the concept of open-source science to monetarily provide incentives for anyone to contribute to an unsolved problem. As noted the government has done this in space race issues by funding prizes for the best invention to solve a particular problem (like finding a cheap way to launch heavy payloads into orbit). This approach has application for small businesses in two distinct ways, one old and one new.

You might have a cloud of knowledge surrounding your operation already, including resources like your attorney, accountant, financial adviser. But is this group big enough to provide all your answers, and more importantly are they incented to do so. The obvious move is to get all you can from these outside sources by making them partners, that is put them on your board (board of directors or advisory board) and make them think regularly about your challenges.

From a product perspective, you may need broader knowledge. Can you solicit advice in the marketplace to improve your product without endangering your trade secrets? Do you have a technical challenge needing outside help? You could benefit from a service like Innocentive which uses outsiders who are paid to solve product issues, and fully one third of its solvers have PhD's. It's worth a shot in this day and age.

So now there are new ways to solve your technical problems to go along with the old ways to fix your corporate challenges. It's worth examining both to see if you can maximize the resources devoted to your success. Your shareholders will be glad you did.

One Exit Gone

It's not that the IPO market is gone forever, but it is closed for business currently. This has caused problems for venture-backed firms needing liquidity, but also makes it harder for small business owners looking to sell. With the IPO market closed, sale prices will be lower. If you can wait for better times you will garner a better selling price, but it will be a longish wait.

If your business plan lists an IPO as near term exit strategy, you can forget it. Oh, the market will come back, just not any time soon. At least according to the folks polled by Inc. magazine. Of the Venture Capitalists polled, 79 percent said IPO activity won't pick up again until 2010!

According to C/Net News, not one IPO was launched during the second quarter 2008 in the US. As they noted in a piece dated July 1,

"The broader pullback in the economy is affecting corporate spending and is clearly impacting the M&A market," Jessica Canning, global research director for Dow Jones VentureSource, said in a statement. "Corporations might be out looking for venture-backed companies to acquire, but many are either doing so quietly or choosing to hold off on entering into negotiations."

Since March, for example, 10 companies have yanked their IPO registrations. Currently, 22 companies still are registered to launch an IPO, but are waiting for the markets to improve before going out, Canning said.

All this means you may want to sit tight until the market rebounds, but you may be waiting a few more years (not just months) for that to happen.

Raise Your Delivery Costs?

In a June article Forbes make recommendations regarding surging fuel prices, Should You Tack On A Fuel Surcharge? Their general recommendations - if you are a transport company, then yes, customers expect it. If not, yes, but bury it in your general product prices. I couldn't disagree more.

Your customers are looking at your invoices carefully, they can see any increase. Why hide it, just call it what it is. You are sending something big or heavy, it costs more, they will understand. The article quotes Robert Moment, a small-business consultant as recommending that as you place this extra price burden on your customers you:

"make up for it with better quality and customer service,"

yeah like you're not doing this already?! Just tell them what it's for upfront, they will appreciate your honestly.

Senate Restores SBA Funding, Expands Programs to Veterans and for Micro-loans.

Good news has arrived for the small business community. While the Bush Administration has reduced the SBA's operating budget by 30% since 2001 (source INC.com), the Senate has restored more than $100 million in funding for this important source of small business capital.

The Senate Appropriations Committee voted to increase the SBA's core small business programs by 45% over the President's request for 2009. The bill increases funding for Small Business Development Centers by 24%, Women's Business Centers by 13%, microloans to $20 million from zero, contracting assistance by 87%, and veterans outreach programs by 62%.

Full text of this release can be found here.

Finding Evidence for Customer Behavior Adjustments

One of the realities I have discovered as a financial leader is it takes some savvy to search out the Truth on which to act. You need sound data to make good decisions, yet the marketplace is not structured to provide it directly. The average news source, whether right wing, left wing, or neither, is driven by a need for readership. Readership, sadly, is a measure of people reading, and people pursue the sensational. The sensational does not usually include the Truth, maybe some small "t" truths, but not the one you seek. Luckily, the advent of blogs and special interest websites has greatly improved the sources of good information.

The price of gas, cost of oil, why it has gone up, and what you can/should do about it, is a good example. The Truth, supported by substantial evidence, is the complicated fact that the price of oil is primarily driven by worldwide supply and demand factors. While supply is relatively fixed in today's environment, demand has been growing greatly. US consumers are still a substantial part of the demand curve. So while no short fix will help much (i.e. opening ANWR would provide less than 1% of current global production), a long term reduction in consumption will. This is born out buy recent statistics on gasoline demand sited at The Big Picture, a wonderful source of macroeconomic data. Easy to see from the chart that as the price of gasoline has gone up, demand is declining, and as a result the price will start to stabilize.

Your read should focus on these real behavioral changes. Consider what a long term adjustment in driving will do to your customer base and therefore your business, and adjust accordingly.

Batten Down the Hatches, a Slowdown is Coming

David Leonhardt at the NY Times is correct about the sorry state of our economy, further bolstered by today's learned comment:

“Six straight months of job losses are the strongest evidence yet that the economy has slipped into a recession of uncertain depth and duration,” said Peter Morici, an economist at the University of Maryland School of Business.

In Leonhardt's article he rates the chances of a recession at 75%. I would tend to agree.

Leonhardt further addresses the fact that we have deeper problems going forward, the toughest one is that we are not creating enough good new jobs. It's a relative lack of innovation caused by our poor recent performance in education. As I have argued in the past, we need to keep all of the college educated folks we can, including the foreign ones, in order to create enough good jobs here. Let's see if this is something the new President will address, as "No Child Left Behind" has not been the answer.