Less than a year after opening the second of their high-end pet-grooming salons in Toronto’s Rosedale area in 2008, Pawfect Spa owners Christina Tsui and Elsie Tang were confronted with a cash-flow crunch.
Thanks to the economic downturn, Ms. Tsui said, “we had people who said, ‘I love your service but I just lost my job. I can’t afford to come here any more.’”
Clients who came in every week began making appointments every two months, she recalled. Less affluent customers reduced their bi-monthly visits to once a quarter. With revenue cut by 30 per cent, “managing cash flow is very challenging, because there are a lot of bills to pay,” Ms. Tsui said.
Cash flow is always an issue for small companies, including those specializing in personal services. Almost a third – 28 per cent – of them cited it as a constraint to business performance, according to a recent Canadian Federation of Independent Business survey of its members.
But when hard times hit, everyone from hairdressers to landscapers to dentists can find business tougher than ever as consumers start rethinking discretionary spending.
Personal service companies do have one advantage over other small businesses, however. “Those kinds of businesses tend to be very labour intensive,” said Doug Bruce, vice-president of research at the CFIB, “and that’s a big issue in terms of more flexible arrangements. Bring them [workers] in when you really need them.”
Pawfect Spa was able to hold on to all 10 employees, for example, by reducing their hours as bookings dropped.
Cutting the cost of doing business is another obvious strategy, experts said. “The fastest way to do anything is to take a look at your expenses and just be ruthless,” said Denise O’Berry, a Florida-based small business expert and the author of Small Business Cash Flow: Strategies for Making Your Business a Financial Success.
“You basically have to go lean,” agreed Ms. Tsui. She and Ms. Tang began to search for alternative suppliers of products used in the salons. “We never used to do that because we were too busy,” she said. “All of a sudden we had to do resourcing. All the shampoo and so on had to be the same quality, so we had to go out and look for equivalent quality, but change the vendor.”
The company’s yearly Lake Ontario cruise was also cancelled – and replaced with a backyard barbecue. They even persuaded their landlord to reduce the rent.
One of the biggest sources of cash-flow problems, however, is payment schedules. “If you’re giving your customers 60 to 90 days to pay, that’s great for the customer,” Mr. Bruce said, “not so great for the small business owner because, in many cases, they may have to pay their suppliers within 30 days.”
“They’re acting like a bank for their client,” Ms. O’Berry said. “They will do the service and issue an invoice to collect their money, and that’s the hugest mistake and the biggest thing that can cause them cash-flow problems.”
While Mr. Bruce suggested trying to negotiate better terms with suppliers, which are often larger companies, Ms. O’Berry is a big believer in getting customers to pay up front.
People go into business so they can have control over what they do, she said. “And if you’re doing things just like everybody else, you don’t have that control. You can ‘train’ your clients about the scope and boundary of your work,” she pointed out.
Another piece of advice: Identify your ideal customer or client. “That’s where it starts,” Ms. O’Berry said. “What do they look like, what is their gender, their expectations, their financial situation – all of those things. You have to focus on those folks and you’ll find them everywhere.”
Too many owners don’t think of doing that, she added, even as studies show that 80 per cent of most small business revenues come from 20 per cent of their clients. “Many times I ask small business owners who their target market is and I get the answer, ‘everyone.’ Well, if everyone is your target market then no one is your target market.”
It all comes down to relationships, said Joe Collura, small business area manager at the Bank of Montreal. “In times of economic slowdown, the relationships they forge with their customers are going to go a long way,” he said. “It’s in that ability to be familiar with one another that we can figure things out. Because there’s no simple answer. Every business is unique and has its own unique cash-flow challenges.”
And while it may seem counter-intuitive, another way to improve cash flow and stave off bankruptcy during an economic downturn is to raise prices. In her business, said Ms. Tsui, “our clients are not comparing our service to company A, B or C. We explained to our clients that we had to increase because we don’t want to jeopardize our quality.”
For Ms. O’Berry, that is a smart move.
“I don’t recommend to anybody that they become the low-cost leader,” she said. “You might lose a few of your customers, but that’s okay because they’re not your target market anyway if they were buying from you on price. The key is value and service.”
In the end, their combination of strategies left Pawfect Spa in a financial position where only their four-legged customers got a haircut. “My neighbours’ salons are not doing very well,” Ms. Tsui said. “Their customers will come to us.”