Take Action Now to 'Recession-Proof' Your Business
I’m no economist, but there sure are a lot of them writing and talking about a possible recession. If a recession is indeed around the corner, I hope it happens later than sooner. But either way, we must prepare our businesses to ensure they weather the storm. I truly believe that those of us who take the right steps will come out on the other side in good shape.
Let me paint a picture of what our industry will look like in a recession. (By the way, this will not be a re-run of “the hot dog story,” which Editor Bob Ulrich covered in the July 2019 issue of MTD.) New car sales will decline. But the good news is that consumers will need to maintain, fix and replace tires and other components on cars that might have been traded sooner in better years. The bad news is that consumers will try to stretch everything from oil change intervals to tire replacement before getting their cars fixed. During situations like this, there can be a temptation to lower our prices, discount services and do anything necessary to get a sale.
Furthermore, car dealers who won’t be selling many new vehicles will instead focus on their higher margin business, which is their service department. They will ratchet up their game to retain old customers and secure new ones by becoming more competitive in service and tires. You may have already noticed this trend in your area. For the first time ever, the average new car dealership lost money on new car sales last year. Dealers are working hard to bridge the shortfall with their service departments. These are only a few of the sales difficulties we will continue to face if a recession occurs.
So, how do we prepare? First and foremost, try to have your balance sheet in order. Too often I see operations that appear to be well-run, but are in fact saddled with high debt loads, low inventory turns and poor owner’s equity. A recession can compound these issues.
Debt occurs because we borrowed to grow, expand or improve, instead of putting our profits into equity, and using that to make improvements. It is hard -- and it may require a change in lifestyle -- but begin paying down your debt as soon as possible. Nothing will improve your lifestyle more than the feeling of having no debt. In addition, having our balance sheets in order puts us in a good position to get money from the bank if we need it, or even better, take advantage of growth opportunities if they come along. One action you can take right now is restructuring your debt to lower your interest rates and payments, and even extending your terms. Pay as much as you can afford in order to reduce principle. If times get tight, this will give you the flexibility to only have to make your new, smaller minimum payment.When the economy slows down, it also can be tempting to curtail all spending and try to “cut” your way through it. This is not the right approach. If you’ve been keeping your debt under control, you may be in a position to take advantage of low interest rates and snag great deals that are sure to be out there. My advice is to plan and spend wisely.
Second, adhere to a budget. Too many shops are paying the bills as they come due and can’t really see what their true monthly expenses are. A budget -- listing the bills that are due monthly, plus expenses that come-up quarterly or bi-annually -- will help eliminate surprises. It also will help you find some fat to cut. Next, continue to invest in your staff. Having great people is critical during tough times. Keeping your employees engaged, setting achievable goals and keeping payroll in-line are some of the most important things you can do to improve your bottom-line.
Finally, make sure you have the right products, when and where customers need them. I believe that having the right products in stock or quickly available is critical to success. In today’s environment, many of us can get multiple deliveries from wholesale distributors each day. We need to leverage that strength to reduce our inventory levels, when able. I’ve never found a tire dealer who couldn’t make inventory improvements. I often hear the statement “That’s a common tire for me,” only to check the dealer’s inventory history and discover that the tire in question hasn’t been sold in four months.
I’d love to hear other things you think we should work on during difficult times. If it comes, the recession hopefully will be a short reset, and won’t have a negative effect on our businesses.