Small businesses may be driving job growth in the U.S., but they are also facing headwinds for further expansion - or in some cases, even staying afloat.A weak dollar and high inflation have pushed up costs for fuel, imported merchandise and other basic necessities. Consumers are cutting back, making it harder to pass on those costs as small business compete fiercely for their dollars. That is especially true for retailers that offer the same products as cost-cutting giants like Wal-Mart ( WMT) or Target ( TGT). "Small companies are particularly challenged during poor economic times," says Tom Northup, a management consultant and author of the book Five Hidden Mistakes CEOs Make. "Most small companies aren't very well capitalized so when revenue goes down that puts great stress on the organization." Still, there are some useful ways to tackle the costs, revenue and capital issues head-on to make sure your company rises above the rest. Cutting Costs Managers must comb through their business to figure out every last expense before deciding what to trim, says Chris Talis, a CPA and senior partner at Hedgerow Mergers & Acquisitions. Then, set up a monthly budget and monitor costs on a weekly basis. "The best way to control overhead is to really and truly know what your expenses are," he says. "It's easy to overspend if you're not really keeping track." Staying efficient is key. For instance, instead of driving around to business meetings on separate days, pile them all into one. Employees and managers should also stay on top of calls and messages while traveling so that they don't miss out on opportunities.
Northup also advises: "Maximize the use of the cash you do have -- don't tie it up in inventory." Small businesses should never cut back on anything the customer will notice, says Tom DeCotiis, co-founder of CorVirtus, a consultancy, and author of the book Make it Glow. Customers will be driven away by smaller portions at the same price, lower quality items, insufficient floor staff or the inability to return merchandise without a hassle. When it comes to "soft expenses" like marketing, reduce spending by looking for low-cost promotions -- handing out flyers, putting signs in the window, using word-of-mouth hype -- instead of doing away with efforts to reach new customers entirely. "Too many people cut marketing entirely and it ends up increasing the spiral of lower sales," says Northup. He also warns against "shotgunning in the dark" with ads that aren't targeted at "helping customers understand that you can serve them better than the guy down the street." It's also important to let staffers know that the efficiencies are being put into place to get through the tough times with the business -- and their jobs -- intact. Building Revenue Though many consumers are cutting back on discretionary items, they're still spending -- small businesses will just have to work harder to get their cash. "In a down economy, it's not like you don't go shopping anymore," says DeCotiis, who was part of a team that put together business plans for Boston Chicken, Outback Steakhouse and Blockbuster Video ( BBI) when they were merely start-ups. "You're just more picky about where you go shopping and you're more selective about where your dollars go."
Small businesses should determine why customers came into the store in the first place, what will keep them coming back and what will prompt them to spread the word to friends and family. "If they carve out a niche and they dominate, then even in slow times, they can grow," says John De Puy, CEO of Ramona, Calif.-based equity firm Oaktree Ventures and author of
Gaining the Edge . Offering added services for the same price can provide a competitive edge as well. For instance, a bookkeeping firm might keep a customer from going to H&R Block ( HRB) by extending hours, meeting at the client's house or adding other bonuses like electronic filing for free. The Web can also be a useful tool for building sales through online shopping, promotions and auction sites like eBay ( EBAY). It's a cheap way to draw existing customers into the store and reach new customers anywhere in the world. Talis also suggests that companies stay on top of invoices and billing: "The cheapest way to collect money it to get what's yours," he says. Obtaining Capital When petitioning lenders, business owners should present all relevant information about their business: Why it is a good candidate for a loan, how it can expand wisely -- and how it will repay the debt. Shop around for opportunities and rates. If the local Washington Mutual ( WM) won't offer a loan, try the Bank of America ( BAC) across the street. If you happen to get two offers, parlay the competition into a lower-cost loan. On the other hand, if no bank offers are forthcoming, family members with some extra cash, private investors and small-business credit cards can present opportunities that banks are simply not willing to supply these days.
However, before accepting any deal, review the terms to make sure the costs are manageable and worth the rewards. Knowing When to Call It Quits Sometimes, a business just won't work because its supplies a product or service that is too costly, inadequate, undesirable or simply offered to the wrong market. Ice-cream shops might not be as popular in Antarctica as they are in Florida, and an outdated, gas-guzzling SUV may not be popular anywhere these days. It's also possible that a business has products or services that people want, but has expanded too far, too fast, notes DeCotiis. "With companies like Starbucks ( SBUX), what gets in the way is hubris," he says as an example, noting that on a recent business trip he saw two locations directly across the street from one another. "They shouldn't have opened up those 600 stores." Managers should assess when business started slowing down, what has been driving the decline, and whether it has enough available capital to wait out the storm. While every business goes through peaks and dips, if it is weak because the market has evaporated for good, managers should close underperforming locations or just call it quits.