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A recession-proof business
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November 3, 1998: 9:31 p.m. ET
Experts have tips to increase cash flow and hang onto clients in a downturn
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NEW YORK (CNNfn) - After watching her candy business grow steadily for five years, the last thing on Sue Castaldo's mind is a global recession.
In fact, most of the small business owners Castaldo knows haven't planned for an economic downturn -- even though some bearish Wall Street analysts think one is coming in 1999.
"I haven't prepared at all," said Castaldo, owner of Candy in Bloom, a small business in Phoenix, Ariz. "I'm optimistic."
It could be one of the biggest mistakes a small business makes.
"The truth is, nobody really knows what to expect, so you have to be prepared," said Paul Hense, a certified public accountant in Grand Rapids, Mich., and a member of the White House Council on Small Business. "People make too many decisions based on incomplete information. You need to do your homework."
Access to cash
One of the first things you should do is secure a line of credit with your bank, Hense said. You shouldn't assume the bank will lend you money -- get the terms in writing.
"Make sure the bank gives you an absolute commitment," Hense said. While banks have been liberal in their lending policies during the bull market, small businesses could face a credit squeeze in a downturn.
It makes sense to reexamine fixed costs like insurance policies, office supplies, Internet access and rent, said Alice Bredin, a small business expert at the American Express Small Business Exchange.
"All business owners can do something to cut costs," Bredin said.
Avery Neumark, a lawyer and certified public accountant at the firm Rosen Seymour Shapps Martin & Co. in New York, said cost-cutting will help you build a cash cushion in case sales go flat.
"A little belt-tightening goes a long way," Neumark said.
You could also wait to pay bills until just before they're due. Many small businesses make the mistake of paying bills as soon as they come in -- but having money in the bank another few weeks can make a difference if cash flow is tight.
Companies should make sure they're not accumulating too much inventory, Bredin said. Watch to see if your inventory turnover rate is slowing down.
Wooing clients
Likewise, building your client base is crucial, Bredin said. Small businesses often rely on one or two big clients for most of their revenue, which can be lethal in a recession.
Try to think of creative ways to hang onto clients in tough times, she said. For example, if a client is having money problems, you could offer to bill him in the next quarter. Or you could barter for services.
You might also look at wooing different types of clients, Bredin said. If your typical customer is a busy yuppie, perhaps you can tap into the 20-something market.
Adjust your thinking
Next, look at the history of your industry, Hense said. How did it weather recessions in the past? What portions of the business did better?
For example, a company that sells computers might survive a recession by doing more repair work. People might not buy expensive new computers, but they'll need to get their older equipment repaired.
Also, prepare a financial plan so you know your "break-even" point, Hense said.
Most of all, never allow yourself to get behind on payroll taxes. Hense tells of a client he had in the early 1980s who "always thought tomorrow would be better." The client went bankrupt and didn't realize he'd still be responsible for payroll taxes.
The client's $40,000 payroll tab increased to $200,000 with penalties and interest. The IRS eventually took his Social Security money.
"In a recession, people will conclude it's better not to pay the IRS," Hense said. "But you should go out of business before you get behind in payroll taxes. The IRS is extremely aggressive. It will go after your home, your car, your pension - everything."
Growth in bad times
While it pays to plan ahead, small business owners shouldn't be so focused on belt-tightening that they thwart new growth, experts said.
One of Hense's clients in the high-tech tool repair business wasn't sure if he should buy $500,000 in new equipment. Hense advised him to buy the equipment -- the man is a risk-taker, and repair businesses will do well in a recession.
"He could lose an opportunity to make millions," Hense said. 
-- by staff writer Martine Costello
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