Coming Down?

Entrepreneur, April, 2001 by Chris Sandlund

RECESSION OR NO RECESSION, BUSINESS AS USUAL WON'T DO IN 2001.

as THIS ARTICLE GOES TO PRESS IN WINTER, THE TALK OF THE NATION FOR THE PAST TWO MONTHS HAS BEEN ABOUT A U.S. ECONOMIC SLOWDOWN. JOURNALISTS ARE TROTTING OUT REAMS OF DATA TO DETAIL PLUNGING CORPORATE PROFITS AND A BEAR STOCK MARKET.

AND SOME INDICATORS, UNDENIABLY, LOOK BAD:

* The Commerce Department showed growth slowing to an annual rate of 1.4 percent in the fourth quarter from the third quarter's 2.2 percent and the second quarter's 5.6 percent.

* The Conference Board saw its widely followed Consumer Confidence Index fall to its lowest point in more than four months: 114.14 in January from 128.6 in December.

* OPEC seems determined to keep oil at or above $25 per barrel, while natural gas prices have risen astronomically.

* Such stalwarts of the New Economy as Intel are issuing profit warnings.

* Fed chairman Alan Greenspan reported to Congress less-than-encouraging news on January 25: "As far as we can judge, we have had a very dramatic slowing down, and indeed we are probably very close to zero [growth] at this particular moment."

Judging by the statistics, it looks like Morgan Stanley Dean Witter chief economist Stephen Roach may have been right when he predicted a recession for 2001 in a January 8 report.

But ... maybe not. The majority of economists think we're headed for slower growth--not a recession. The Wall Street Journal's annual forecasting survey asked 54 economists for predictions. Consensus has growth slowing to 2 percent in the first quarter before accelerating to 2.9 percent at year's close. Unemployment should also remain low.

"The economy has too much momentum to be in a recession in 2001," says Bill Dunkelberg, chief economist at the National Federation of Independent Business, adding that federal, state and local governments spending their budget surpluses will be an added buffer in the coming year.

Another factor to remember is the breadth of the American economy. "Over the past 20 years, not every sector has gone into recession at the same time," says William B. Gartner, the Henry W. Simonsen Chair in Entrepreneurship at the University of Southern California in Los Angeles. "There's not lust one industry cycle."

Still, it's hard not to get skittish--especially if you've never been through this before. At press time, we were closing on the 10th straight year of economic boom--plenty of time for many firms to mature without ever feeling the nasty backside of the economy's hand.

And, for fast-growing companies, 2 to 3 percent growth can feel like a recession, says Michael Cosgrove, principal and founder of capital market advisory service The Econoclast Inc. and participant in the Blue Chip Economic Indicators survey. With lower inflation expected in 2001, pricing pressure will be tight. At the same time, customers will be squeezing you to cut prices further as slow growth limits their expenditures.

"We have a slowdown in expectations but not in spending," says Dunkelberg. "It's a question of how fast or whether these expectations get translated into spending."

PROCEED WITH CAUTION

If only the paranoid survive, it pays to be cautious. The economy's growth has slowed faster than anyone expected, and a recession may show up as quick as a champagne hangover.

We've talked to academics who study entrepreneurs, business owners who've weathered these storms before and professionals who work with distressed firms. Here's their advice on dealing with rough financial waters:

* Set and monitor benchmarks. First and foremost, you need to establish realistic goals--and monitor them religiously. David Minor, who sold his 300-employee landscape company to ServiceMaster Co. in 1998 and is now the director of the James A. Ryffel Center for Entrepreneurial Studies at Texas Christian University in Fort Worth, notes that only 30 percent of the entrepreneurs in his executive education class have budgets. Do you?

Minor suggests working on zero-based--not zero-growth-budgeting. "Start from scratch every year," he says. "Don't assume you're going to [spend] the same just because you did [before]."

In a slow-growth period, Minor says, it's particularly important to get financial statements from the previous month by the 10th of the current one and to revise your budget every three to six months. "If you're not hitting your top-line numbers, you're going to want to evaluate the expense side," he says.

Not all benchmarks should be related to money, though. "Financial monitoring comes at the end," says Earl Eisenberg, a business consultant and workout restructuring specialist in Chagrin Falls, Ohio. "[But] you also need monitoring at the beginning and in the middle." For example, try establishing the time it should take employees to finish tasks and then monitor how long it takes them to do so. If employees meet interim goals, you'll stay on budget.

* Line up cash.

Money is always king, but never more so than in a downturn. That's why Rich Squar, founding partner in Newport Beach, California, firm Squar Milner CPAs and Business Consultants, advises businesses to check their lines of credit before things get out of hand.