Going down?

Entrepreneur, Feb, 1999 by Paul Deceglie

The rumors of our economy's impending demise may be greatly exaggerated - but that doesn't mean you shouldn't prepare for the worst.

While economists quibble about this year's economic outlook, Deborah Noland is preparing her interior design firm for the worst, while hoping for the best. The downturn that began after the stock market plunge last August recalled for Noland her experience a decade earlier: Following the 1987 crash, Noland & Associates barely managed to eke through the ensuing recession by slashing fees and targeting high-end residential clients unaffected by mundane economic disasters.

This time around, Noland's Matthews, North Carolina, firm will be ready if the economy hits the skids. "We've cut overhead, paid company debts, renegotiated long-term financing and initiated aggressive marketing efforts throughout the booming Charlotte market - not to mention launched our Web site," says Noland, 47. "Whether we're heading into a recession or it's just a momentary dip on the economic roller coaster, I'm pulling out all the stops."

Similar views have been voiced by a growing number of diverse business owners who, until now, have known nothing but a vibrant economy, which hasn't helped equip them for the potential economic downturn ahead. So just how might this downturn impact entrepreneurs and what can you do to protect your business?

"[1999] is going to feel particularly bad for businesses because we've experienced such good economic conditions for the past five years," says Mark Zandi, chief economist for Regional Financial Associates (RFA), a research and U.S. economic analysis provider in Philadelphia. "We've had double-digit growth for much of the recent past, and we'll see only marginal profit gains in 1999, so business [owners are] going to feel that the environment has changed dramatically."

HIGH EXPECTATIONS

Jim McCoy, a partner in PricewaterhouseCoopers LLP, puts it another way: "Most companies have high expectations built on an almost maxed-out economy that has produced increasingly greater sales and revenues." McCoy, a cost-management consultant, notes that "At the same time, fixed costs have climbed; more people are in elevated positions at higher salaries; companies have moved into new buildings; and more expensive benefit programs are in place. Unlike the 1970s, it's not inflation that has escalated the cost of doing business. In fact, we have a deflationary economic environment, which makes it difficult to pass on those costs. So 1999 will be a tough economic year, particularly for companies overburdened with increased fixed costs."

To mitigate some of her expenses, management consultant Nancy Dorrier plans to transform her staff of seven paid consultants into a cadre of commissioned independent contractors. Dorrier, president of 10-year-old Dorrier Underwood in Charlotte, North Carolina, already feels the pinch: "Client dollars are being redirected away from [our] long-range corporate vision because of reduced profits and downsizing," she says.

Dorrier's $1.2 million firm is broadening its revenue sources by offering a new "mastery program," which brings together small groups of executives from various companies for week-long intensive studies in management, says Dorrier, 54. "And we're investigating avenues that might help us economize," she adds.

Dorrier is helping other businesses make the same kinds of preparations she's making at her company. "Ask your customers about their plans," she advises. "Get input from your banker and anyone else who might have a vested interest in your success or who might be at risk in a tough economy."

How tough? Economists aren't in agreement on the severity of any impending downturn in the business climate or when it will be felt. Bank of America senior economist Nancy Woodall predicts a less robust economy this year with the gross domestic product declining to a 2.2 percent growth rate from 3.6 percent in 1998. But she expects inflation (as measured by the U.S. Consumer Price Index) to climb to only 2 percent, compared with 1.6 percent in 1998. Woodall is also forecasting a rise in unemployment to 4.8 percent - from 4.5 percent - and a decline in housing starts to 1.47 million homes this year, down from 1.58 million in 1998.

Similarly, RFA founder Zandi predicts slower growth in 1999 based on his projections of a 1.7 percent increase in the gross domestic product, unemployment of 5.1 percent, a 2.3 percent rise in the Consumer Price Index, and a decline in housing starts to about 1.39 million. "I expect 1999 to be the weakest year for the economy since 1992, but still nonrecessionary," says Zandi. "On the other hand, recession risks are rising quickly. The deepening global financial and economic crisis is clearly the most significant challenge yet faced by the nearly 8-year-old economic expansion."

GET BUSY

Whether it's a downturn, a recession or an economic dip, business owners need contingency planning. Zandi urges entrepreneurs to:

* be cautious about making expansion and hiring plans.