FRAM SYSTEMS ^blog

OK, let’s face it, our economy, if not already in shambles, is running head long into what will be perhaps the biggest economic downturn in history. Let’s look at some of the core reasons why this is happening now, what it could mean for your business and how to act now to prevent it from decimating everything you’ve worked for.

Here’s a little background for those that don’t really understand how the money supply works. Banks don’t really have all the money you deposit with them. They actually only are required to have about 8% of it. The rest they use to make loans on which they hope to earn a return. That return pays for the operations of the bank, it’s buildings, payroll, advertising etc., and offsets the cost of managing your accounts. By lending 92% of of your deposit the bank has essentially created that much money. For a detailed explanation of how this works see http://en.wikipedia.org/wiki/Fractional-reserve_banking#Money_crea
When borrowers are able to pay back the money the bank is OK but when the borrower can’t pay it back the bank is still in debt to you for the full amount you deposited plus interest, if any. If the bank’s reserves are high enough they can pay you back.

Our current situation was brought about, in part, because of falling real estate values. Since banks have to careful with their money and need to assured that they will not simply lose it when they lend it to you they require some insurance in the form of collateral or real property of intrinsic value which the borrower agrees to forfeit should they not be able to repay the lender in cash. If the value of the asset remains stable or gains in value the bank is protected. When the asset declines in value the bank loses the difference of the amount they lent and the market value of the asset. Recently we’ve seen the world wake up to the fact that banks are in a losing position because real estate, where banks have most of their collateral value, can no longer protect them due to it’s decline in real value. Depositors, especially large ones have recently scrambled to get as much cash as they can leaving banks in a ‘liquidity crisis’. This is a very simplified analysis but should help you understand the ‘credit crunch’.

People are now frightened by the publicity surrounding the situation. Their fear has been created and fueled by the President, the Federal Reserve Board and the media. What’s worse is that almost everyone can agree the so called ‘Bailout’ package passed to last week is far from perfect and many economic pundits are calling it flawed and ‘unlikely to have the desired effect’. We have also been warned to the likely inflationary pressure this ‘bailout’ will have.
(http://www.nytimes.com/2008/10/06/business/06econ.html)

So how do people act when they are worried about an uncertain economic future? Well, one thing is for sure, they will curtail or stop spending on everything that they consider non-essential. They’ll buy fewer new cars, fewer trips to the movies, fewer vacations abroad, whatever they feel they can do without.

Take the Money and Run

So what do we as business people do to protect our businesses from this crisis. First, if we have credit lines we can draw on we should take our money and put it into some safe place. I won’t make any recommendations on where that should be but the traditional mattress comes to mind. Why take this money now? For whatever reason you took the line to begin with: buy materials, vehicles, equipment, payroll or marketing. Those needs won’t go away and you may still be faced with a short term cash flow shortfall.

Go on a Diet

Next you should take a long hard look at where precious dollars are leaving you company without producing profits. What cuts can you make that will not interfere with your ability to fulfill orders? Can you cut utility bills by installing more efficient equipment or repairing or rebuilding old equipment? Do you have excess inventory, equipment or production capacity that you can sell? One thing I would not sell is real estate. Hold on to that but make sure it is producing income. What can you do now to cut expenses? I hate to suggest it but is there any payroll you can cut without causing too much bad feeling in your current workforce? If you can’t think of or see anything you can cut, perhaps you should hire an efficiency expert to help.

Sell, Sell, Sell

Now redouble your marketing and advertising efforts. Take the money you’re saving from increases in efficiency and some of your credit lines to assault your market with compelling offers that will bring you sales. If you already have a well thought out marketing plan go over it again. Refine you message. Make it clear that doing business with your company is not only the smart choice but the only logical choice for your market and be clear about why. Talk to your current customers and ask them what the like and dislike about doing business with your company. Enlist expert help and insist that you pay them by the results they produce. That way you’re assured that the money you spend with them is producing bottom line profits for your firm. Do you have a pricing policy that protects your dealers and customers? Make sure you’re pricing makes sense and is clearly communicated.

Ally your products with a cause. Education, Economic Development, Health, Environment, Disaster Relief and Hunger are some of the top causes that catch our attention. (http://biz.yahoo.com/bw/081001/20081001005317.html?.v=1). Select a cause you believe in. Explain clearly and in detail exactly how you are contributing to cause. Show consumers that by using your product they will have a measurable impact on advancing their cause. Walk the Walk, don’t just Talk the Talk.

Brainstorm, Talk and Test

Everyone that works in or with your company may have ideas that can help you become more efficient, improve product design, point out new potential markets or reveal opportunities you’ve been missing. Brainstorm with them all. Evaluate their ideas and don’t reject them out of hand but test them. I guarantee you’ll be surprised by the impact of seemingly simple suggestions made by a receptionist, truck driver or janitor. By the same token be wary of elaborate or expensive schemes brought to you by managers and consultants. Demand they do the testing to prove their theories.

Take Advantage of the Situation

Does your company have retail locations, physical plants, distribution centers or factories? Now is the time to look for new space and renegotiate leases. You landlord may have a valuable lease from you but if they think you are in danger of failing they may renegotiate on more favorable terms. Evaluate whether buying a new facility at discount prices makes more sense than your current lease. Does moving your operations to a friendlier environment save in taxes and other expenses? What countries, states or communities will offer your business incentives to relocate?

Look, these are just some ideas. New situations demand that we think and act in new ways that fit new circumstances. Those that evaluate, understand and adapt survive while those that deny, entrench or capitulate will fade away. Creation of a sound strategy is neither simple or easy and you and your management team could use an unbiased clear perspective. When looking for a consultant or adviser I suggest you find someone willing to put a stake in the game and work on the fruits of the results they produce.

At Fram Systems that is how we operate. We always work for a percentage of the measurable results we produce.