Alliance Advisory Group Blog

This February, Forbes Insights and CIT Group Inc. released an eye-opening report: “U.S. Small Business Outlook 2010: Lessons Learned—A Case for Greater Optimism.” The authors interviewed more than 200 business owners and key executives in $1-15 million companies, creating a snapshot of where we are now, in the “new normal.” The study’s real value is in the implications the data holds for businesses of any kind as we move cautiously into the recovery.

Nearly all of us faced challenges during the downturn—some more dramatic than others. The question is: how will business owners apply the lessons we’ve learned to make the most of their opportunities, internal and external?

Here are the four key lessons from Alliance Advisory’s perspective:

Lesson 1: Have a plan

In the last 18 months, many companies hit a wall, or worse yet, broke through that wall only to fall off the top-line revenue cliff.

The recession has shown us that small and mid-market businesses did not have the control necessary to maintain or stop the decline, and took drastic action to limit losses. In large part, these actions were reactive rather than planned.

The downturn—and its eventual impact on operations—was not something many smaller companies had prepared for. From mid-2008 and back, we were fat, dumb and happy. Times were good. Money was flowing freely and being spent. A certain degree of complacency worked its way into the system. The majority of companies, as indicated by the survey, did not have a plan of action to put in place if tough times hit, so they made changes on the fly, scrambling to redefine themselves without a model.

Only 64 percent of the companies surveyed intend to aggressively seek growth in 2010. What about the other 36 percent? They are not done reacting to the downturn. The unspoken fact is, they are worried about survival, not growth.

Lesson 2: Plan for profitability within the “new normal”

Having survived the recession is an accomplishment in itself. Just being in existence puts you in a position to benefit where others have failed. The exact definition of the “new normal” is in flux, but we can say unequivocally that the mentality of “if it isn’t broken, why fix it?” proved suicidal. Assume that your business model is broken somewhere and you have just not noticed yet.

Smart companies thrive by constantly reinventing themselves. Does that mean radical change? No. It means evolutionary awareness: constantly analyzing what they do, and how, where, and for whom they do it—adapting to the changing competitive landscape.

If your company has survived, you might be tempted to let down your guard. Don’t! You may have dodged a bullet, but the next shot is unpredictable. Protect yourself by truly understanding your operating expenses. Start by taking the top ten expenses by percentage of total, and drill down into them, identifying opportunities and risk. For service businesses, the biggest expense will be human resources. Do you have the right people, doing the right things, and are the roles and expectations clearly spelled out and articulated?

Revenue growth is an excellent goal, but in the new normal, focus on profitability first. Our clients have seen up to triple-digit increases in profitability from single-digit increases in revenue, just by making their operational mechanisms more efficient.

Warren Buffett remarked that when the tide goes out, you learn who’s been swimming naked. Plan now for low tide.

Lesson 3: Plan for complementary revenue streams

For companies targeting growth in 2010, much of the past two years was spent looking inward, rationalizing the business model based on the new revenue reality. Once you’ve planned for profitability in the face of 20, 30, even 50 percent revenue declines, it’s time to expand market planning and evaluate new revenue opportunities.

Your company has a skill set and capabilities in a particular area. Going forward, you must find ways to exploit these to get a bigger slice of the pie. I advise clients to identify what they do well, boiling it down to their core competencies, and leverage these to take advantage of other opportunities in the marketplace.

When you’ve defined new offerings to take to the marketplace, start with your existing clients. With good will already established, your chances of selling something new or additional will be much greater than recruiting a new customer.

The greatest threat to finding new revenue opportunities is tradition (we do business this way because we’ve always done business this way). A resistance to change equates to a failure to take risks.

Lesson 4: Build accountability into your plan

Planning is not a once-and-done exercise. It is a process. When you’ve set a plan for a period of time—say, your fiscal year—you need to revisit it regularly. I recommend evaluating results against your plan at least monthly. Develop a standard process for measuring performance against the plan, and evaluate progress on your key objectives at least monthly. Once a quarter, evaluate the bigger picture. How has the landscape changed? What new needs or threats have appeared and how will you maneuver around them?

Entrepreneurs create businesses around a passion or a particular proficiency, but the disciplined management and execution of strategic, operational and financial plans tend to be elusive.

If that is the case in your organization, building accountability into your planning process can mean the difference between growth and mere survival.