If you run a small business, you're already thinking lots about the recession and what the weakening economy means to your firm. That's good, in a sense. Careful, thoughtful analysis should provide you with lots of ideas about how your business not only survives but thrives over the next year or two.



A warning, however: Don't, in a rush to do something, do the wrong thing. In particular, you want to avoid three, really terrible business planning ideas for a bad recession:

Bad Business Planning Idea #1: Cutting Prices

In a weakening economy, cutting prices seems an attractive idea. After all, customers seem slower to buy. Competitors may be circling your favorite or best customers. And you only need to glance at a newspaper to see that "price cuts" standout as the tool of choice for big companies like the auto manufacturers....

Cutting prices usually doesn't make economic sense, however. And for a really simple reason: The accounting doesn't work. But let me provide an illustration...

Suppose you're selling an item with a fifty percent profit margin. Say, for example, that you sell some item for $100 that costs you $50. And maybe you think you should cut prices by 10% to "stay competitive" or grab customers from a competitor.

All that sounds smart enough, I grant you. But the problem with a price cut is this: You'll almost never make up in extra sales the profit margin you lose through price cutting.

For example, to break even on a 10% price cut like that described in the preceding example, you actually need a 25% bump in volume. In other words, if you drop the price from $100 to $90 (thereby dropping your per unit gross margin from $50 to $40), you'll need to jack sales volumes by 25% to get back to the starting point. In a recession. When competitors probably have the same "let's cut prices" idea. And when the economy is shrinking.

Tip: You can test the arithmetic results of this by doing a back-of-envelope calculation or by using a spreadsheet program.

Bad Business Planning Idea #2: Fixing a Business Model that Isn't Broken

In a bad economy--particularly when one operates in a cyclical industry--you may be tempted to completely revamp the business model: You can easily decide to change a strategy, fiddle with structure, and swap tactics, for example.

This sort of makes sense. The business may not, after all, be producing profits or adequate profits.

But the problem with "fixing your business model" is that your model may not actually be broken. In a sense, the thing that's really broken is the economy. Once the economy recovers, your business model will again work.

And then of course there's the giant problem with re-engineering a business model: You don't really know that you'll be able to identify, test and implement a new, recession-appropriate business model before the bad economy ends.

Bad Business Planning Idea #3: Keeping Unprofitable Customers, Products, Etc.

Cold as it may sound, a recession also provides you an opportunity you probably don't want to miss... That opportunity? Dumping unprofitable customers, products, employees and so on.

When the economy is healthy, dumping products or people you don't make money on presents a conundrum. Yes, you should cut the cord. But terminating customer and employment relationships sends all sorts of scary messages to all sorts of people. And when you start thinking that way, you can pretty easily procrastinate.

In a recession, however, people expect these sorts of restructuring. And even if someone does (unfortunately) take a special interest in some action you take, well, you know some other, bigger business will do something even more newsworthy tomorrow or next week.

Bottomline: You don't want to miss this opportunity. And remember, you don't make these sorts of changes simply to jack profits for fat cat owners or overpaid executives. Rather, you make these sorts of changes to increase the likelihood that you'll still be in business, still be employing most of your workforce in the months and maybe years of recession we have ahead of us.