The stock market is down. What does that mean for your small business?
Updated March 12, 2020
My clients and I have been talking about the impacts of coronavirus, or COVID-19, for a few weeks now. But with this week’s stock market drop, I wanted to bring that thinking into one place. I’m thinking about this in three ways for self-funded business owners:
- Is this like 2008’s market crash?
- What are my health risks?
- What should I do for my company?
As my BFF often says, panic creates chaos, and chaos creates mediocrity. And you, as a small business owner, cannot compete on mediocrity. So let’s tackle those panicky feelings like CEOs and make some bets.
Is this like the market crash of 2008?
Most of us started our businesses after 2010, so we’ve had a long period of relatively good conditions. For us “summer CEOs,” this may be the first time we’ve had to ask hard questions about the overall economy. So let’s start with why this is not that.
2008’s market crash was caused by the unraveling of many years of poorly considered financial bets and outright fraudulent behavior by mortgage banks and credit houses. A lot of people got loans for stuff they couldn’t afford. And then a bunch of traders made bets on those bad loans, which made them 5-10x worse in terms of impact. (If this is new info for you, check out Michael’s Lewis’ The Big Short, available in book or movie form.)
The result: the market dropped when that imaginary wealth was exposed, and the impacts rippled out as companies failed and people lost their jobs. In other words, nobody had any money to buy stuff.
This drop is different. It wasn’t caused by any malfeasance or bets on whether people could pay their bills.
What did happen was a sudden, unexpected disruption to the global supply chain. There’s an unexpected gap in stuff to buy.
A supply chain is like a hose. What happens when you kink a hose? Water stops flowing. That’s basically what happened in China over the last few weeks — a kink in the global supply hose. People in China couldn’t work so stuff couldn’t get made.
COVID-19 broke out during the world’s largest annual migration, Lunar New Year. Each year a billion people in China travel within a few days, and then travel back two weeks later. In contrast, 51 million Americans travel for Thanksgiving. Multiply Thanksgiving by 51 and you get Lunar New Year travel.
All production closes for two weeks. Businesses around the world plan for that two-week supply disruption.
But with the emergence of coronavirus, the Chinese government told all of those workers, you can’t travel, nor can you go to work. They told business owners, you can’t open your factories. And they also said, we’ll tell you when you can start again, but we don’t know when.
So in other words, the Chinese government kinked the supply hose. No people. No travel. No work. No stuff. Not sure how long. Pretty big kink.
But, the US financial markets saw this as temporary, until this week.
So what changed? The virus spread to more than one continent.
With its restrictions, the Chinese government was trying to slow or stop the spread of the virus. What we learned this week is that its temporary kink didn’t work. (But, it does seem to be working within China.) And now more places and countries could impose their own restrictions, further kinking up global flows of goods and people.
Since we don’t know how quickly the virus will spread or how many people will be affected, traders are now making bets about how bad the global economic impact — our collective ability to make and buy stuff — will be. This week’s selling, in other words, is a sign that the finance community thinks things will get…pretty kinky.
To me, this is still a flow problem that will resolve, we just don’t know how quickly. It’s harder to make and move stuff, and we don’t know how long it will stay this way. With trillions of dollars of goods and services moving around the world every day, any amount of slowdown changes the way we individually run our companies.
How worried should I be about my health?
Like any respiratory virus, COVID-19’s major complication is pneumonia, which means compromised lung function. Up to 20% of cases could develop pneumonia. That’s higher than common flu, but the only data we have is from a quarantined population. All the sick people were clustered together.
So far this year, 31 million Americans have gotten the flu. 12,000 have died. That’s 0.4%. The death rate of COVID-19 is between 0.6% and 3.0%. Any any case, significantly higher.
At this writing, a few hundred Americans have tested positive for COVID-19. The best place you can track is on this dedicated CDC page.
The global science community can introduce a tested vaccine in 12-18 months. Until then, it’s important to stay current on public health advisories in your area.
In the meantime, some people, we don’t know how many, will get a mild flu and will have to stay home for a week. Up to 1 in 5 will get pneumonia, and some will die from those complications.
In real terms, the impact on us as business owners is more likely from delayed decisions, sick days, and time taken for caregiving. And the acute, immediate issue is mistakes made because of panic, stress, uncertainty, or overreaction.
So, what should you do? Be a rational leader. Be responsible for your people. Adjust your policies to encourage those who are sick to stay home.
And do what you should do anyway: practice good hygiene. Wash your hands. Carry hand sanitizer and put it around your office. Keep three feet between you and other people. Wipe down surfaces of unknown hygienic status at home and in public without concern for feelings or how you look.
So what should I do about my business?
Monitor your cash flow day-to-day. Be prepared with a Plan B and Plan C should the situation change.
If you rely on raw materials or manufacturing from China, you are already facing uncertainty over your supply chain. You may trust your suppliers, but they’re beholden to the information and demands of the Chinese government. Not known for their transparency.
If you can get your stuff from another place, start having those conversations. You may need to make short-term margin tradeoffs (in other words, pay more) to replenish your stock.
If you’re not concerned about having physical things to sell, then you’re making a bet on what you think will happen with your own customers.
If your customers are the 40% of Americans who can’t afford a $400 emergency bill, you are going to feel it first. Or with customers who are already struggling to pay. If these aren’t your customers, we’re playing a longer game.
Here’s a typically “stock market falls” impact progression:
- Stock prices drop
- Corporate earnings are downgraded
- New hires freeze
- Budgets get cut
- Some consumers cut back on spending
- Spending on ads, marketing, and consultants falls
- People get laid off
- Spending freezes
- Consumers definitely cut back on spending
In ten days, we’ve rapidly progressed down this list. Consumer spending is a trailing indicator. In other words, Americans stop spending only after things are definitely bad and they are feeling financial pain.
Some practical considerations:
- Communicate. Be clear with your team and your customers about what’s going on and any steps you’re taking to avoid or mitigate issues. Remind your team what to do if you’re seeing an area of impact, like a change with a key customer or a supply problem. Even if you don’t feel in control, you can use this opportunity to build trust.
- Plan. If you’ve never had a budget, don’t understand your business economics, or aren’t clear on who your customer is, it’s time to do it. Get a good foundation for making informed decisions. You’ll understand more of the tools available to you when it becomes time to adapt to things out of your control.
- Increase your cash reserve by 1-3 months or get a line of credit. I recommend holding no more than 3 months of operating expenses, but you may want to increase to 4-6 months. But don’t overdo it. This is not yet a “people aren’t buying stuff” problem, it’s a “we don’t have stuff to sell” problem. If you don’t have a line of credit yet, get one in place. A line of credit is effectively an emergency fund. We want as much cash as possible to go toward growing your business, not sitting in an account collecting 0.6% interest.
- Step up your marketing activities and customer service. Counterintuitive, I know, but developing the customers you have and increasing your pipeline with your ideal prospects will give you more options, no matter what happens. This can be an investment of time versus money spent.
- Be sure you’re delivering value. Value means people think they’re getting a good deal, regardless of price. What’s driving customers to choose you and stay with you? Maybe it’s your customer service, branding, or content. Maybe you solve an essential problem that they can’t solve on their own. Use this opportunity to find out whether you’re winning because your customers see value in what you do, or because you’re the cheapest.
- Try out remote work. Try a work from home day with your team and see what breaks. Increase your online and device security. Try videoconferencing instead of nonessential travel. Set up cloud-based systems that work from anywhere through a browser. Building those skills and systems is good business, no matter what your outlook.
What not to do:
- Don’t panic. Look at primary sources of data whenever possible. Check in with yourself about what feels scary. Work the problem. If you have only operated your business in a growing economy, ask a seasoned vet how they weathered past downturns.
- Don’t start competing on price. Discount now and you have nowhere to go if the market downturn is sustained. If your competitor is doing it, they might be in financial trouble. If you’re not, don’t do it because they are. Instead, evaluate whether what you do is perceived to be valuable by your customers. If they only like you because you’re the cheapest, you have different problems.
- Don’t neglect your pipeline. Keep developing your customer base, even with the uncertainty.
If you need help…
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