Managing in a Recession

Woodward says one of the biggest concerns in a shaky marketplace is liquidity. “We’ve been profitable, but being profitable is different from having strong cash flow,” he says. “We’re making sure our credit terms are appropriate for our business. We’ve had to tighten up some of our credit policies.”

If a business involves the selling of goods, another important way to stay liquid in a recession is to carefully manage inventory. At Chocolat Celeste, the inventory is perishable, so to a certain extent, Mary Leonard strives for just-in-time fulfillment. But making artisan chocolates is labor-intensive, so not everything can be made the day before it’s needed.

“We like to have a maximum of two weeks’ inventory on the shelf,” she says. “We’ve always operated that way, but now I’m extra-attuned to it. And anything I’ve bought, I try to think of an alternative use for it. If I make [a filling for] a bonbon, it’s really the same recipe as a truffle, so I can repurpose it. I have specials. Any restaurant would do things like this, but it’s more rare for a chocolatier.”

Quality Bicycle Products in Bloomington is the largest parts and accessories distributor in the bicycle industry, serving more than 5,000 dealers. Part of its value proposition is importing parts from all over the world, absorbing long lead times, and taking care of complex purchasing requirements so that the dealers can buy in a just-in-time fashion. That’s great for the dealers—if sales slump, they aren’t stuck with a bunch of inventory. But Quality Bicycle has to order parts several months in advance, and is less able to turn on a dime.

President Steve Flagg explains that much of his company’s ordering is done using a predictive model by a software package and other market intelligence. The software estimates future needs based on past seasonal patterns and the company’s recent growth rate. That’s fine in normal times, but the fall of 2008 was a wrench in the works.

“In the last couple of years, we’ve had some really significant growth rates—20 percent or so,” he says. “But then November came along, and it actually showed a slight decrease in sales. I think it was the first time in 30 or 40 months that that had happened. So this downturn has provided some real learning opportunities for us. We learned what the limitations of our purchasing software really are, what it does and doesn’t do, and how to make manual changes.”

There’s still the question of how much inventory to order, though. “At this point in time, without a ton of knowledge about 2009 and without experience in this current market, we’re projecting flat [sales] or a slight decrease,” Flagg says.

Because no one can really predict the future, many companies try to prepare in advance for hard times by instituting lean business practices. Nearly two years ago, Eagan’s Big Ink Display Graphics started a concerted recycling and waste-reduction effort that has corresponded to a period of double-digit growth.