Part 1 of PROFIT's Growth Forum roundtable series examines economic uncertainty and how to prepare for whatever's ahead.
Given the recent market turmoil and disappointing economic news, what are your expectations and concerns for the next 12 to 18 months?
RANDALL LITCHFIELD: If the downturn in 2009 was any indication for us, we're not too worried. We grew by 5% that year, instead of a much higher percentage before and after. Because we're a digital-messaging company, we're on the right side of history.
But I am worried about the larger economy. I don't think I've ever seen an instance in which you have almost equal arguments for incredible deflation or incredible inflation. We seem to be at a tipping point, but nobody really knows which way we're going to tip.
KEVIN HIGGINS: I'm also worried about the overall economy. I think North America is in trouble. And I say North America because I think the U.S. is in really big trouble, and we're tied to the U.S. economy.
But if you take it down to the small-business level, I think tough times are neat to be a part of because they show what you're made of. In 2008, when the recession began, we said at our company, "Let's work a little harder. Let's hire some people." By 2010, our number of staff was up by 50%. We didn't say, "Oh my God, things look terrible. We'd better cut back." Instead, we hired people and worked twice as hard.
In 2009, even though our sales force worked hard, our sales were down by 5%. But in 2010, our sales team saw the payoff from that work. This year, we had a fantastic first half, but the second half is looking tougher. So, we're saying to our sales team, "You've had a good run. And now you're going to have to work a bit harder for it."
The business is still there; it doesn't stop in tough times. It goes down by 5%, or it goes down by 30%. But even then, there's still 70% of the business. So, I just want to make sure we stay ahead of our competitors and we work harder and smarter. Because then, even in tough times, we'll do OK.
TAMARA BARKER WATSON: On a micro level, 2008 was our best year. We sat all the staff down and said, "Guys, we're in for tough times. This is going to be a team effort. We have to pull together." And everybody rose to the challenge—and kept rising.
I know that we're closely linked to the U.S. and that I can't retire tomorrow because of what's going on there. But on a day-to-day basis, Halifax and Nova Scotia are kind of sheltered because we didn't have a bubble, so we couldn't have a bust. We're steady as she goes.
What I did to be proactive is have lunch with my bankers and get lines of credit set up. Because banks will always give you money when you have it. So, I set this up ahead of time, just in case there are issues.
BOAZ SHILMOVER: I've started to watch the news now purely for entertainment, because the economic outlook changes every day, depending on whom you're listening to. I've come to the conclusion it's just too big for any of us to understand.
BARKER WATSON: I think a lot of people have concluded that.
SHILMOVER: I'm cautiously optimistic. You have to be optimistic to be in business. That's the only way you'll survive in any environment, good or bad. I look at it from an Alberta perspective: the world still needs 88 million barrels of oil every single day, which is a positive thing.
The negative side is that the U.S. dollar is cheaper than the Canadian dollar now. When the Canadian dollar was worth 80 cents, there was, in effect, a 20% discount on the price of oil. So, what concerns us is that if the U.S. doesn't find a way to repair itself—and I think that's going to take longer than anybody imagines—a lot of the oil companies in Calgary will negate the projects they're working on. And that would have a trickle-down effect, not just in Alberta but in B.C. and Saskatchewan as well, which is our company's base.
That being said, there's always work out there. Developers are retrofitting their buildings rather than building new ones. Oil companies still need to service their existing facilities. And governments always spend money, regardless of the situation. So, we're going after those projects.
You should operate your company to reflect the economic times. Don't assume there'll be an upswing or downswing in a month. Operate within your means, watch your bottom line, watch your costs and identify opportunities. Because this could be the norm for the next year or two.
MARY GAGLIARDI: Any economics classes you've ever taken give you absolutely no ability to understand what is going on now. It changes so quickly. We're liquid; we're not liquid. It's up; it's down. Is it deflation; is it inflation? We could spend a lot of time—and I wonder if it's almost wasted time—trying to understand it. Instead, what I see a lot of good businesses doing is building in enough flexibility to allow them to manoeuvre through whatever economic conditions prevail.
As a former business owner myself, I think that all you can do is develop your business and stay focused on it. Understand who you are, and excel at it. Build in the flexibility to move in other directions. And make sure that you have the capital to sustain a potential downfall.
Bankers, by their nature, are likely to be there for you when the tides are running high. And it's funny: in my experience, that's often when debt is not something that entrepreneurs will seek out. They'll say, "I don't need you right now." But I always say, "Take the money when you don't need it."
SHILMOVER: That's true. We secured a capital infusion from BDC six months ago. You guys put out a financing offer and we looked at it and said, "You know what? They're offering us X dollars and it's cheap money. Our ratios will allow it and I have no idea what's going to happen in the future. Let's take it."
The capital is there now, and it creates a buffer. Our clients are taking 60 to 90 days to pay us, and some even longer than that. But this capital allows us to buffer that.
GAGLIARDI: Companies tend to approach us at BDC when they've had a bad year, when the market has created a bad environment—and yet, we're still there as lenders. But any time you have to go to a lender in a state of desperation, it's not a position you want to be in. So, you need to plan, and that's why we keep talking about the need for you to get advice about that.
SHILMOVER: When we got the capital infusion from BDC, it raised the eyebrows of our other bank, which we deal with daily. They called us up and asked, "What's going on with BDC? We want your business." They actually increased our line of credit, because they don't want us going away. And they asked us, "Are we not servicing you enough? Are we not providing enough support for you?" So, there's another benefit to getting this capital—for once, we're watching banks battle over us.
BARKER WATSON: You should never be in bed with one bank—ever.
GAGLIARDI: That's the value of alternative lenders. We're complementary. We're never going to take the core business away from banks; nor do we want to. We want to provide high-leverage financing, working capital—not the day-to-day stuff.
Entrepreneurs should find out about alternative lenders, not just BDC. Become aware of who you can go to for financing. Because if you wait for things to fall out from underneath you, it may be too late.
LITCHFIELD: Whatever we're into, whether it's inflation or deflation, I think a given is that it's going to last for five to 10 years. And that will slow the economy.
I say that because the U.S., which is the cornerstone of the problem, has so much debt that it has to wash out of the system. And that's at all levels of government, as well as at the consumer level. Canada was in the same position in 1993, and it took us seven years before we eliminated the deficit and started paying off the national debt. But we're benefiting from that now.
The U.S. has to go through a similar process now. What's unknown is whether their political system can handle that, because it's very divided and deadlocks easily.
Can you provide a sense of what you're doing to secure your businesses, given what's coming ahead?
HIGGINS: One measure that we pay a lot of attention to is productivity. One of my goals is that our firm is always 20% to 30% more productive than our competitors are. To do that, you have to make sure that you have the right people and really pay attention to productivity.
If you're preparing for tough times, you have to be more financially conservative. Make sure you're not overstaffed; be careful about your debt levels; and pay close attention to your cash flow, so that if things slow down, you're not so close to the line that you're forced to take drastic measures.
Kevin, what are some of the things you do to ensure that you're 20% to 30% more productive than your competition?
HIGGINS: Lots of training. Also, a good friend of mine said to me, "If you want a good company, hire good people; but if you want a great company, hire great people."
But that's one of the biggest challenges, because there are tons of good people out there. Companies often hire those good people and keep them for a while. They wind up with someone whose productivity is merely good—versus the person who makes you say, "Wow!"
We don't bring people on unless we think they're going to be great. We make lots of hiring mistakes, but we own up to them quickly—not just for our sake, but for the employee's sake.
I can think of someone we hired this year who didn't make it to three months. And it was obvious that they weren't at the same pace and productivity level as our other people—they were good but not great. It wasn't good for them, and it wasn't good for us. So, we took action to help them move somewhere they can be successful.
Sylvain, foot orthotics are a primary product category for you. Most people get them through their corporate insurance plans. And when they're laid off, they no longer have that insurance. So, is there anything you're doing to prepare in case the worst does come?
SYLVAIN BOUCHER: You're right that insurance is a big threat for us. We just went through the SWOT process—analyzing our strengths, weaknesses, opportunities and threats—and that was our No. 1 threat. People who need orthotics are becoming more aware that they do and are buying more of them, but insurance is not working that well for them.
So, we've put in place a plan to take a leadership role in talking to insurance companies. We'll say to them, "It's costing you money to pay for orthotics. But it's also investing in the health of your customers, and it alleviates pain and increases productivity." We're trying to bring objective measures into this process.
As far as financing goes, we went through an expansion phase at our head office and paid for everything from working capital. We went to the bank and obtained $1 million for that. We took the opportunity to ask different bankers for this financing—even asking European banks to bid. We were very surprised to find out their interest rate was 1.75 percentage points less than here.
In the end, we did sign with a Canadian bank, Desjardins. That's because, in view of our future financial needs, we felt that we were better off establishing a solid partnership with a Canadian bank. And Desjardins' financing included a 75% guarantee through Investissement Québec.
We've also increased our line of credit. Even if we're not using it at a certain point, this credit facility is in place so, within 10 days, we can have it running based on our inventory. We asked for the increase in our line of credit based on the quality of our receivables. Most of them are from governments—which don't pay very quickly, but they do pay. So, the bank increased the percentage of the value of our accounts receivable they use to calculate our credit line.
Regarding how to prepare for a bad economy, flexibility is very important. I always stress to my managers that if we're going to face an economy in turmoil, we have to make sure that we're really, really sharp in our execution. As well, we have to make sure that we're generating a good gross profit per employee. And we have to make sure that we're more productive than anyone else.
Randall, what are you doing to prepare for a potentially tougher economy?
LITCHFIELD: This year, we became very formalized about all our financial forecasting and implemented a lot of new procedures. We adopted formal quarterly forecasts that permeate throughout all our departments, and that helps us track our productivity a lot more closely.
We've eliminated any kind of debt we had, although we've tended to be a debt-free company anyway. But we've also talked to our banks about increasing our lines of credit in case we need them.
This is the second real company I've launched. With the first one, I went through the classic "venture capital, raise $1 million on a business plan" kind of thing. And, although that worked out OK, it meant giving up a lot of equity in the beginning.
This time, we bootstrapped it and used our own financing. That has given us a lot more independence. We borrow when we need to, but we always pay it down quickly. That's how I run my personal finances, too. So, I'm sleeping better these days.
The Growth Forum roundtable series was produced by PROFIT with the support of BDC.
Read Growth Forum II: How to Get the Cash You Crave about how smart entrepreneurs finance growth—and find good bankers
Read Growth Forum III: The Fine Art of Managing Gen Y about better ways to manage people—including those tricky 20-somethings
Read Growth Forum IV: How Companies Prosper in Tough Times about how leading companies sell in a weak economy, build their brands and market online