Wednesday, February 18, 2009

Surviving the current crisis

Current crisis is going to test the best. It is going to strain finances to the brink of banckrupcy. So how can small businesses survive in this challanging environment? Simply put, using two rules. Cash is king. Stay humble - stay together. Let me elaborate.

Cash is King!
In any crunch / slowdown what matters is staying power. Cash gives you a fantastic buffer to outlast the crisis. Here are a few steps that can help conserve cash but remember each case is different - so careful with these.
Income Side
  1. Diversify income streams: Now is the time to cross-sell ancillary stuff around your key products. Generally - lower cost items that enhance longevity of the product get better business in these times.
  2. New Products? Remember the customer focus has changed from "saving time" to "saving cost"! In tough times objects not central to functionality are difficult to sell. So T-shirts about your brand are less likely to sell at premium. But smaller price point items that reduce cost for customers are desired.
  3. Merchendise ads: It might make sense to sell merchendise at cost as a substitute for local advertising. (Caution alert)
  4. Mittens with ovens: Give add-ons and make selling price reasonable. Be fair to all - be fair to youself in setting the price. Sometimes add-ons help - again things ancillary to the product use will get better sales. Give away mittens with ovens!

Cost side:

  1. Know your costs: 10% discount if you by bigger lot - may not always be a good idea.
  2. Cut costs like crazy: Reduce inventory, negotiate with suppliers for discounts.
  3. Throwing away money? Reduce wastage, a lot of things can be reused - if not by you - by others who will pay for the stuff.

Employees or your team?

Big corporations are quite fast at reducing employee head-counts. In my view, this is a really wrong move - more so if you touted "employees are my assets" mantra. I believe employees are like players on your team. In such times rather than cutting employees - you can change payment terms. An employee taking home $1000 can now take home $500 as fixed cost + $500 as variable. For next 5 years base the variable on cash contribution to the business. And remember - pay-cuts go from top to bottom and hikes go from bottom to top.

Monday, February 09, 2009

Henry Ford v/s Greg Mankiw and real arguments for free trade!

Greg Mankiw, whose work and insight I really admire, argues against protectionism of Obama government. However, he does make the popular point - that lower Chinese Yuan helps keep cost of US consumption basket lower. Henry Ford turned this argument on its head and increased wages of his labourers so that they can afford to buy the cars Ford made. In the same vein, I think Americans would be happy to afford higher cost products and buy them rather than have low cost products that they cannot afford. To make it clear, I am not denying the beneficial effects of lower cost products. Just that the real argument for free trade is different.
US needs to keep the roads to China well-paved. Sooner or later the Chinese Yuan will appreciate against the US dollar. Then US will need China to keep trade barriers lowers to allow US access to Chinese markets. But that means keeping US trade barriers down in current scenario. Obama talk on protectionism might only serve to precipitate the currency regime change. But even just talk will be harmful for US interest in the longer term. Obama will do well to take up Wen Jaibao's free trade argument.