(FORTUNE Small Business) – About a decade ago, when the last recession struck, Jacob Siegel Co., a venerable men's outerwear maker in Philadelphia, found itself in a bind. Business was terrible; as a result of the downturn, sales of its overcoats were shrinking. Despite annual revenues of $5 million, the company was losing money, and its bank wanted to cut off financing. Siegel knew it had to slash expenses, but instead of just cutting back on pencils and paper clips, it embarked on some emergency soul-searching. "We decided if we had a future," says CEO Stephen Saft, "it would be a different future."

First, the company had to keep itself breathing. Thanks to a friendly banker who ignored the skeptics, Saft managed to restore financing of his company's receivables. Then he began moving inventory by slashing prices. But most important of all, the company tackled its deeper problems--including the rise of casual men's wear, which meant fewer customers for its classy long coats--by changing its business model. Although it kept its core product, Jacob Siegel extended its product line to give clients like Brooks Brothers and Nordstrom what their customers wanted--less pricey jackets and sports coats. To cut costs it began to outsource production, and it forged a strategic alliance with another clothing manufacturer so they could combine such administrative operations as data processing. "The goal was to cut our fixed overhead by 50% so we could be profitable no matter how sales fluctuated," Saft recalls. The strategy worked. Today Jacob Siegel is a profitable concern with annual revenues of $30 million.

Entrepreneurs everywhere should take the Siegel story to heart. When the economy takes a downturn, the reflex is to stop spending, slash budgets, and cut staff across the board. With good reason: "To survive a recession, a business owner must be obsessed with cash flow--quite simply, a company's monthly income relative to its monthly expenses," urges Andrew J. Sherman, a Washington, D.C., attorney who's an advisor to many small businesses and the author of Raising Capital (Kiplinger Books, $34.95). The trick is cutting the fat without cutting the heart out of your business. That takes strategic thinking. As Sherman explains, it's about not just how to save money but also how to make money by finding overlooked niches that can rev up sales and grow market share.

So how do small companies manage their cash when economic storm clouds gather? To explore that question we turned to three businesses--an electronics-parts distributor, a chain of quick-lube auto shops, and a janitorial maintenance company--that weathered the last recession in 1990-91 and subsequently thrived as a result of their creative cost-cutting and income-producing strategies. Here are the survival lessons they learned as crisis managers that can help any entrepreneur grappling with the recession of 2002.

Lesson No. 1: Become an ardent penny pincher. Nothing prepared Chris M. Cooper, founder and chief executive of Triangle Electronics, a 17-year-old distributor of electronics parts based in Ronkonkoma, N.Y., for how bad things were when the Gulf war helped send the economy into a tailspin a decade ago. Suddenly there was just no business. Determined to avoid layoffs but unable to meet payroll for his half-dozen employees, he started taking cash advances on his eight different credit cards.

Managing cash flow became a preoccupation. Triangle did everything from reducing employee medical benefits to re-using cardboard boxes. Capital spending--a new phone system, for instance--was all but halted, with any needed office furniture acquired for a pittance at other firms' going-out-of-business sales.

To get more timely payments from customers, he became innovative. Because it took banks five business days to clear out-of-state checks, he opened a checking account in Texas, where one of his largest customers--Tandy--was based so that deposits could clear in two days. He offered customers a stunning 25% discount for paying cash on delivery, and when FedEx promised to get the customers' money back to him faster than other delivery services, he switched. He also curbed his personal spending, skipping vacations for four years.

Triangle in those days was a classic case of what Sherman calls bootstrapping, the art of doing more with less. "Bootstrap management understands that all resources are scarce, and that cash must be cherished," he explains. All the while, Cooper was confident that his business would someday grow far beyond what it already was. That is why he increased inventories during the downturn; with so few orders, business tended to go to vendors that could deliver immediately from stock on hand. When customers couldn't pay in cash, he would settle for payment in goods they hadn't sold--in other words, he bartered.

Today Triangle employs 65, including every member of the hardy band who nursed the company through hard times ten years ago. Back then annual sales were perhaps $2 million; last year the figure was $32 million, says Cooper.

Lesson No. 2: Keep your finger on the pulse of performance. Things were bubbling along nicely at Oil Changer, a Pleasanton, Calif., chain of quick-lube shops, when the 1990 recession hit. The downturn hurt so much, says founder Larry Read, that at one point the company (which had $17 million in annual revenue) had $2 million in losses and only enough cash to make one more payroll. Ironically, Read says, it was the hard times that transformed Oil Changer into the more successful business it's become, now doing $40 million a year in sales. "You get complacent when things are going well," he says. "You start spending foolishly. You don't have your eye on the ball."

The recession neatly drained away such behavior from Oil Changer. To help stop the financial hemorrhaging, Read began using technology to monitor the performance of each of the company's 39 outlets, which collectively service 700,000 vehicles a year. He invested $2 million to develop a computerized network that ran proprietary Web-based data-mining software. The home office could then get real-time information about each outlet's sales and the extent to which customers were buying profitable additional services beyond oil changes. It enabled Read to keep more timely track of which stores were doing outstandingly well or badly. After pinpointing the laggards, headquarters gave store managers tips on how to get their operations up to speed. If they were unable to, a new manager was brought in or the outlet was closed down. Within a year the company shuttered four stores and was able to post a $2 million profit. Today the system is used by all of Oil Changer's store managers, and the company makes 10% of its net income by licensing the software to other firms.

Lesson No. 3: When your income well runs dry, dig another--fast. The experience of Laro Service Systems shows how important it is not only to stop red ink from flowing but also, if necessary, to look elsewhere for new revenue sources when old ones shrivel and die. In 1990, when the recession hit, Laro was a provider of cleaning and maintenance services to aerospace firms such as Grumman and Aerospace Industries on New York's Long Island. Business was drying up fast. Worse yet, the company's biggest customer went bust, owing $250,000 at a time when all of Laro was doing only $4 million a year. And then Laro's bank canceled its credit line. "We tried every trick in the book to increase cash flow," says founder and chief executive Robert Bertuglia Jr., including offering prompt-payment discounts of 2% to customers while squeezing vendors to allow 60-day payments instead of the usual 30.

But clearly stronger measures were required, and so Bertuglia moved to diversify his customer base. Recognizing that when times are tough people shop at discount stores, he decided to take Laro in that direction while stick-ing to its core janitorial business. He quickly landed service contracts worth $750,000 with such retailers as Kmart, J.C. Penney, and Marshall's. He also pursued government janitorial and maintenance contracts; this wouldn't be hugely profitable, he knew, but government checks don't bounce, and it was a way to keep the business going at a time when money was so tight that Bertuglia often couldn't even pay himself. The company managed to land a few big fish in the government, including the Internal Revenue Service center in Holtsville, N.Y. In an example of the lasting benefits that can come of hard times, such government work still represents about 15% of Laro's business.

Today Laro has 2,400 employees and annual revenues of $60 million, but the hard times may not be altogether in the past. Recently the company spent heavily to move its headquarters into the neighborhood that contained the World Trade Center, and its business there (which accounted for 5% of sales) has evaporated since the terrorist attacks. With another recession seemingly afoot, Bertuglia says the company plans to pursue more of the government business that helped keep Laro afloat last time.

Any company that wants to survive in today's turbulent times must set a dual course in managing cash flow. First, it must crack down hard on costs without damaging the core of the business. Second, it must find new ways to boost cash flow by entering new markets. That's exactly the path taken by Jacob Siegel, the men's clothing company mentioned at the start of this article. Now, says Siegel CEO Saft, "no matter what happens next, we're ready." And so you should be.