Tips to Recession-Proof Your Business Strategy

0:00Yeah, I mean, I think when it comes to diversifying your revenue streams, it can be tempting to say, let's go and launch a bunch of different products to new audiences, but you got to understand you're introducing some pretty significant. unknowns and it might work and it might not. So if you're going to look to diversify your revenue streams, which I do believe is a good idea, asking yourself, how can we sell more to the people we're already serving is where I would start. And so that is now, again, if you figure people have less than, you know, you may reach the bottom of that well, but that is definitely where, you know, where I would start.

0:35And I know for us, we pivoted from frankly, selling things that might've been more of a group type activity to more of a one-on-one service-based thing because people want results now. They want it sooner rather than later. We've shifted from trying to do everything ourselves to saying, let's enter into and engage in more affiliate type opportunities so that we can sell somebody else's thing without having to create it. So I would just say, start with the people you're already serving. If you go out there and say, get panicky and try to launch something totally new to a totally new market, it better work.

1:09If it doesn't, you could be way worse off than when you began.

1:17Hey, everybody. Welcome to another episode of Business Lunch. I am one of your hosts, Roland Frazier, and my cohort counterpart and business partner, Ryan Dice, is your other host. Ryan, how are you doing today? I'm doing very well. Your cohort? yeah everything cohort all the things yeah yeah all the all the all the C's cohort I feel like I feel like I got a promotion I guess that's what I'm saying I'm very excited about it no I'm doing great how are you I'm doing great doing great except I will tell you I have seen across our portfolio of businesses and pretty much everybody I talk to says business is down and um have you heard that out in the world as well yeah yeah i mean in talking to clients portfolio companies everybody seems or if it is up it's taking it's requiring like a herculean effort of they're doing they're doing some really new you know new things um but it's it's not one of those deals where oh we just got to show up this year and just by nature of being here, we were 10, 20 % higher.

2:26Like it's now 20, 21 and 22, and maybe even 23 was right. I mean, it was just kind of up into the right. It was like panicky there at the beginning of 20, but then it just kind of went crazy good across all of the different things, even the physical businesses that were having trouble, like adapted and everything, probably because there was a lot of money being thrown into the, into the world and interest rates were, you know, money was free to borrow and it was also free to get for free to not have to pay back. And it was forced innovation. Everybody and everybody was seeing what everybody else was doing.

2:59And so, yeah, I think we look back on 2020 obviously being a really difficult year, but 2021, 2022, and to your point, 2023, I think most of us, a lot of us kind of started to sense a slowdown, but in 2023, consumer sentiment always lags reality. And so they were still fully lagging. And I think where we are right now is, you know, it's funny things I believe are improving. I think there's a lot of uncertainty around the election and, you know, you got seasonal slowdowns, which we talked about in previous episodes, um, in a lot of businesses in the summer. Um, but, but yeah, I mean, it's grind right now across the board.

3:41I don't know. I don't really know anybody who's saying like, oh yeah, no, it's a piece of cake, crushing it. So if you're experiencing this, you are not alone. The question is, what can we do about it? And just to kind of help you guys, we did a little bit of research and the things that indicate recessions are all pointing that way right now. We've been kind of amazed at how long it took for this to happen because it was just like, you know these are like when this happens this happens but none of that was going on it's like all the bad things are happening housing prices are going up and you know and uh inflation and interest rates and all of these things are happening and yet sales were continuing to break records every single month and that just we were like how what you know can't when is the you're going to drop.

4:35Yeah. Much, much like the, uh, much like the, uh, the prime loan situation back in the, in the day and also the crypto world, right? It can't possibly know the new reality is always profit, but, um, but sadly that's not true, but here's the deal. A few things, the U S treasury yield curve, uh, is inverted and has been for some time. So they say that is a historically, predictable predictor, excuse me, reliable predictor of inflation. GDP is down, gross domestic product. Inflation is high, as we all know and experience. Monetary policy is tightened because they've increased these interest rates trying to tame inflation.

5:14And we have all kinds of geopolitical risks, including supply chain disruptions, the Ukraine, Russia, military operations slash war, depending on where you live, what you can say, and so on and so forth. And so the World Bank, the International Monetary Fund, most of the major economists and business leaders are all saying, you know, hey, it's finally here. And so the question is, what can you do to prepare, assuming that it hasn't really hit for you? Because it's very likely that it will get a lot worse. Let's all hope that it's not. I'm very optimistic in life. And so I'm going to hope for the best.

5:55but I think planning for less than optimal is a good way to go. And so I'm going to run through a couple of things and then just kind of bounce back and forth with Ryan on these. But some of the proactive steps that businesses can take to prepare, one is build cash reserves. The historical ideal is somewhere between three and six months of operating expenses. You and I talked about it, I think on the last episode that we liked the idea of one, well, I'll let you say it. Yeah. It was the one, two, three method, I think, was what we came up with. You came up with a cool name for it. I had not thought about that.

6:33But yeah, I mean, it's basically you want one month operating in your operating account and then probably two to three months in actual savings was kind of where we landed. I like it. So building cash reserves, that's something that if you haven't done, definitely do that because I can tell you from our own experience, having cash reserves allowed us to get out just to retire our credit facility, for example. That allowed us to save interest and also this ridiculous cycle that it was credit, but it wasn't really credit when they finally got around to saying, we actually just want you to take the full amount of the credit line and have that in our bank.

7:12And then we will lend your money back to you at an interest rate that we're totally secured on. And I was thinking, man, you know what, Ryan? If we could get into that business, that's pretty great. It's loan people their own money back to them at interest. The second one is diversify your revenue stream. So don't rely on a single product or market. And that's an important thing to think about. Thinking about what are the new opportunities? And I think it's important because the new opportunities are likely, like you've got your core thing, but there's always somebody chasing you. There's always somebody that wants your business, that's innovating better than you are, faster than you are, that's exploring new markets, that's thinking about how can I eat away at what you've got?

7:56And so I think it makes sense to always be vigilant and assume that somebody's coming for you because they are. So diversifying your revenue streams makes sense for that. How have we done that in some of our portfolio companies. Ryan, you want to share a little bit of that? I think it's important. People might think about. Yeah. I mean, I think when it comes to diversifying your revenue streams, it can be tempting to say, let's go and launch a bunch of different products to new audiences, but you got to understand you're introducing some pretty significant unknowns and it might work and it might not.

8:30So if you're going to look to diversify your revenue streams, which I do believe is a good idea, asking yourself, how can we sell more to the people we're already serving is where I would start. And so that is now, again, if you figure people have less than, you know, you may reach the bottom of that well, but that is definitely where, you know, where I would start. And I know for us, we pivoted from frankly, selling things that might've been more of a group type activity to more of a one-on-one service-based thing, because people want results now. They want it sooner rather than later. We've shifted from trying to do everything ourselves to saying, Let's enter into and engage in more affiliate type opportunities so that we can sell somebody else's thing without having to create it.

9:16So I would just say, start with the people you're already serving. If you go out there and say, get panicky and try to launch something totally new to a totally new market, it better work. If it doesn't, you could be way worse off than when you began. Yeah. And one thing that we did in one of our businesses was that you were talking to one of the sales directors about was that we had too many products coming out. And that was, they were all related to, they were all related and they sold well, actually, to the audience that we had. So it was very difficult to stop doing it because you want to serve your audience.

9:54And if you've got a good long string of products in the hopper, it's very nice to get them out there and see the revenue. But in terms of an actual sales force being able to deal with that, that was becoming kind of confusing for them. So that's a risk too, right? Yeah. Yeah. Complicate your sales process. It just slows everything down. Another one is reducing your debt, lowering your interest payments and freeing up your cash flow for other needs. It's a tough time to think about reducing debt. But I will tell you the thing that I mentioned about retiring our credit facility. It was the right move because it really wasn't serving us.

10:34And we were, you know, we were losing that money and we weren't really because it was in a savings account. And at the time savings was, you know, it was paying what less than 1 % interest. yeah so it didn't really make sense and what was weren't we at like eight percent or something like that on that money it was bad yeah yeah i think it was six point something but yeah it was bad it was it was bad for as low as interest rates were at the time and that would only be worse now so if like if you've got cash that you've got this would be a kind of a thing to think about if you've got cash reserves in excess of three months i would definitely look at taking that extra three or more months cash reserve you've got and pay down debt to free up the interest rate and lose your dependency on that.

11:16I would try to keep, ideally, if you've got a credit facility, keep the untapped portion of it available so you have that to access as well. But it would be, I think, a good fiscally responsible decision to say, I'm going to shift some of my cash reserve that's low interest earning over to reduce debt that's obligatory and high interest cost and still have an adequate reserve to cover the one, two, three that we talked about. It also shows that you're servicing that debt, which is really, really important because now is the time when people need the debt the most, they accumulate a lot of debt.

11:58It winds up looking a little bit scary on some of these lenders' balance sheets. And so they look for people where they go, okay, where can we go and reduce our debt obligation? So they will take lines of credit, they will take credit limits, and they will take them all the way down to what you currently owe. I remember this happened to me back in the last financial crisis. I had a$250 ,000 line of credit. I only had$68 ,000 out on it. And so they reduced my line of credit to wait for it $68 ,000. Now, I hadn't serviced any of that debt. I wasn't utilizing it. I wasn't taking more out. I wasn't making payments, you know, to try to bring it down.

12:34And so from their perspective, they just saw it as a whole lot of like, whoa, this person isn't making any payments on, and I wasn't required to be on the minimums. But because I wasn't servicing the debt, because I wasn't utilizing it, I only looked like risk in their eyes. So I think, you know, to your point, it's worth showing that you're somebody who is beginning to pay off some of that debt. So they see you as a good creditor. I like it. Reassessing expenses, cut any unnecessary costs and prioritize your essential spending. I think that's something we talk about in the Get Stops Now program, or excuse me, this Stops Now program in Scalable.

13:12Do you want to share a little bit about kind of how we go about doing that? Yeah. I mean, so Richard, our president of a number of our companies, and we roll this out, encourage all of our clients and all of our portfolio company CEOs, at least once a quarter, send an email to anybody who's got credit cards, anybody who's got the ability to spend. The subject line is this stops now. I promise you, you send that subject line, it's going to get about 100 % open rate to your internal team and say, hey, expenses have gone up. Things are getting a little bit out of hand. And so what we're going to be doing is we're going to be printing out the credit card statements and expense reports for the last 90 days.

13:56We're going to sort them based on what was the most expensive. I want you to run through your particular expense report, any credit cards that individuals have, and I want you to color code green if it's absolutely essential, yellow if you want to question it, if we have something to discuss, and red if it can be killed. Let's see how much we can save. Every time we do that, we save tens of thousands of dollars a month. Yeah. And I think in terms of the reprioritizing expenses is a good thing to think about too, because the next one on the list, number five is strengthen your customer relationships and focus on customer retention and loyalty.

14:33The customers that you've got, especially the recurring revenue customers you've got or the renewing customers that you've got, or those who could renew or buy more, those are so much more likely to buy from you than cold traffic. So I would suggest take a look at what we talked about last episode, which was the slow sales method where Ryan ran an experiment and they were basically able to have, it was an improved conversions at half the cost or same at half the cost. I forget. Double conversions in half the cost. Okay. So the double half. That doubling of conversions at half the media spend freed up money to either spend on more of that, or maybe the half that they saved could actually go towards how do I re-engage and create retention and stickiness with the people who are already customers, who already love us, and God forbid, who are already paying.

15:30Because those are so, so, so silly to lose. And typically what it takes to keep them is just a little love. So like you could, you could reallocate time even of some of your people over there. That's a reallocation of an expense on labor, or you could reallocate ad spend on cold traffic to existing traffic, or even towards maybe getting new affiliates, which are centers of influence that can send more than, you know, single customers at a time. But I think going through that exercise can be really, really helpful. And then reviewing supply chains. So what are the vulnerabilities that you've got right now?

16:05And can you diversify your suppliers? And we talk about this in Scalable when we talk about what are the 63 things you can do to increase the profits of the company. Reducing expenses is one. And one of the ways that you can reduce expenses is go to your suppliers and renegotiate. And so if you haven't done that, that's something that would be good to think about. Maybe going through an RFP, a request for proposals, among the potential suppliers that could supply, including the suppliers that you've got. And again, I like the idea of printing out from the income statement by account for suppliers from most expensive to least, most spend to least.

16:52And I mean, you can very often find significant savings there. And even if you can't get things at lower cost, the ability to get credit can help you too, because that's a one-time benefit for however many months of credit you're allowed there. So a couple of things to think about there. So investing in technology, automating processes, improving efficiency and reducing labor costs. I just read an article this morning in the venture capital world that AI, which obviously the VCs have been investing heavily in companies that are AI, is also now creeping into their infrastructure. And that typically on the administrative side from outreach, research and administration, they need 50 percent less or 50 percent fewer people.

17:43And so the cost of labor has gone down by about 50 % by substituting in AI. So think about how can I use AI? How am I using it right now? But is it possible to use that to automate and make more efficient things that I've got that I'm spending on right now? And not necessarily that you even have to terminate the people that you've got. You could basically get the benefit of that efficiency by then reallocating their time to something like keeping your existing customers happy, right? So I think, think about how do I shift? All of this is malleable. How do I shift it around to get it in the most optimized way?

18:22And I think, you know, I think bringing AI in as probably the biggest opportunity for technology to benefit your businesses is a kind of an easy one. Any, any other thoughts on that? Certainly CRMs, if you're not, if you're not, if you don't have one of those now, right? Yeah, I just, I think there were a lot of quality of life investments that were made during the last boom cycle. And that quality of life could have been, I'm going to hire this person just to do this thing because I don't want to have to do it anymore. I'm going to invest in this software because, you know, we'll use it from time to time.

18:54A lot of those quality of life things now, looking back, you realize we don't actually need it. It didn't improve the quality of life, you know, that much. And a lot of it could also be offset or completely replaced by AI. And so I love what you said. Maybe you don't necessarily, you know, cut those expenses completely. Maybe you reallocate them to where, oh, look, now we've, you know, we just found an extra five,$6 ,000 a month that we can throw towards acquisition. You know, we just found an extra five to six thousand dollars a month that we can throw towards retention towards, you know, an extra account management, customer client success manager, somebody just go and love on our people.

19:34Like, you know, I think it's not always about cutting. I love that you're continually emphasizing reinvestment. Yeah. And the other thing to that end would be upskilling employees would be number eight. So how can I get the employees that I've got to be better, to be more valuable to the company? A lot of that is how can I support them by educating them? And AI would be a great example. If they're not using that right now, how can you help them understand how to use it? Maybe they don't have time because they work nine to five for whatever paycheck they get. Then they go home and then they're not doing anything there.

20:10They're not willing to invest in themselves. Many people, most people aren't. So can you, within the context of the time that you have them, that you're paying them, help them to upskill as well? I think that's a really good investment. That's something we provide like through digital marketer. Maybe you send them through digital marketer courses on how to be better marketers. Maybe the person that was an admin who now you can replace with AI goes through some digital marketer courses and learns how to do SEO and then becomes somebody that helps create that using AI, right? There's lots and lots of things you can do.

20:45But I think it's just thinking and brainstorming, how can I make my people more effective? And as a rule of thumb, we usually like in an ideal world for labor to be for payroll to be no more than 20 percent of total sales. Right. So that means that we typically would like each employee. Think about that. If it's 20 percent, we would ideally like each employee to be generating five times what we're paying them. So how do I make my employees more valuable to the company? Now, that could mean in terms of cost savings, you know, because there are maybe the receptionist cannot make five times his or her salary, right, because they're answering the phones.

21:31But maybe they can because they get more efficient. How do you allocate that? Those are all challenges. But if you are thinking this way, then you're thinking, I need to always be making my employees more valuable so that they can help us achieve this target that we've got as to what's the ratio of payroll to sales. And one of the best ways you can do that is to always be upskilling them. And if you're upskilling them, you're also building a bench potentially of cross-trained people that can then ascend up through the organization when somebody goes away and you get somebody that is already trained and familiar with everything and saves you the average, I think,$20 ,000 to$40 ,000 cost of bringing a new employee on just in terms of lost productivity and education and getting up to speed.

22:19So I think upskilling is a really often overlooked area. And not just to add something to that, it's not necessarily upskilling, but something that everybody can do that's free is simply to raise your standards. I think another consequence of the last boom cycle that we had is business owners were so terrified that, oh, my people are going to leave. They're going to they're going to quit. And so we frankly coddled a lot of our employees. And I think now is the time to reset a lot of those expectations and say, hey, look, times are tougher. OK, so we need everybody to be a little bit more efficient, a little bit more effective.

22:54You know, I know in the past you used to deliver X. I now need you to deliver Y. Let's talk about how we can collaborate on making that happen. So I don't think it's fair just to say, you know, do better and not support the minute, but say, you know, hey, how can what would need to be true that isn't true today for your output to be, you know, why instead of the X that it was before. So just raising the standards and having those conversations, I think, is big. And usually it's free. Yeah. And just to go back to the example I gave of a receptionist. So let's say that you're trying to figure out how do I measure that?

23:27Well, maybe it's in terms of labor. How many calls or interactions is the receptionist currently handling? And if you scale the business, at what point would you need to hire the second receptionist? And what does that second receptionist cost? And let's say it's 40k a year. OK, well, now if that first receptionist could become twice as productive, then because they have skills on how to use AI and phone automation, et cetera, to be better at their jobs. And now you don't have to hire that second person. Well, that's a pretty direct doubling of the efficiency of that person. So that's that's another way to run that analysis if you want to.

24:05The other we talked a little bit about explore new markets, look for growth opportunities in new markets and new segments. Do you have a process of how you look at that when you're doing it? I either want to sell something. So my first question is, how do we sell more to the audience that we already have? Because one, you already have them. Therefore, any additional sales are going to be at the highest possible margin. You know, no new acquisition cost there. So that's always where I want to start. if I need to go beyond that market, I want to ask, how do I take what I already have and sell it into a new market?

24:43What I really want to avoid is selling something totally new to a totally new market because that's called a totally new business. So how do I sell the thing that I already have into a new market? And usually the best way to do that is to align yourself with some type of strategic partner, center of influence, somebody who not only is going to give you access to the market that you don't necessarily have, but they're going to be able to explain to you how to nuance your offering and your message or your messaging to make it better fit with that market. I like it. The, um, and then the last one in that section would be contingency planning.

25:14And this is something that, that I spend a fair amount of time doing, which is, um, here's what I'm anticipating to happen, particularly in terms of budget. Um, what do I expect revenue to be? What do I expect expenses to be? What is the timing of those things? And I'll break it down by day. So I know generally what I'm expecting to happen over the next 30 days, but I go out typically to the end of the year. So what am I expecting to happen in terms of when will things be coming in? And if you're doing promotions or you have average daily sales, that's an easy way to kind of schedule that out.

25:55And then what expenses do I have? And a lot of expenses are timing controllable. So if I know that cash is going to be weak here, then why would I not be thinking about it enough to say, well, let's not have this big renewal of this contract happen here. Maybe there's a renewal of a contract and it's a hundred K contract. It's going to cost me, but it's happening in the weakest part of the middle of the month in the slowest month of the year, which let's say is August for me, right? Okay. Well, I'm going to reach out before that renewal happens and I'm going to negotiate, how can we postpone that?