Small Biz Diary: A Family Business Looks Ahead

Like many business owners, I've never operated in a bad economy. Since trading in my reporter's notebook in 1996 after a 10-year career with BusinessWeek, I caught the lucky break of only operating during good economic times. Undoubtedly our family-run plastic packaging manufacturer benefited. Over the last 12 years, we've increased sales to more than $60 million, up from $18 million when I joined, which had been the company high-water mark since its founding by my father and three partners in 1963.

Looks like my luck has run out. Today, like almost every businessperson on the planet, I'm acquainting myself with a scary new reality: a collapsing economy. Deflation threatens to undermine our margins, thanks to the sudden collapse of petrochemical prices in the late fall. Plastic, a byproduct of natural gas, plunged, sticking us with overpriced inventory while customers demanded price cuts. Some of those same customers suddenly began to pay beyond terms. Just two years ago, our average customer paid us in 21 days. Today, that has stretched out to 30 days. One customer basically hasn't paid us in five months. And though we've been cozy with our bank for years, they recently tried to renegotiate our credit line. No wonder I'm drinking a glass of wine with dinner, a practice I cut out several years ago in a bid to trim my midsection.

Sometimes I wonder if I'm worrying unnecessarily. Our sales continue to increase, up 10 percent since our fiscal year began Sept. 1. The market for our product—packaging for the produce industry—has historically been recessionproof. "People have to eat, after all," my father likes to say. As if to confirm his wisdom, our backlog stands nearly 35 percent fatter this year compared to last, thanks in part to new products designed to keep produce fresher longer. Add to that the addiction many Americans have to the convenience of packaged salads, one of our strongest sectors, and I should be feeling pretty secure, even with the economic turbulence.

But it's hard to feel secure when even industry veterans say they've never seen anything like this recession. Take food consumption. It's falling for the first time in years, and the fresh-salad market isn't bucking the trend. Industry groups figure salad sales will either stagnate or decline this year, an unprecedented development in an industry used to double-digit growth. If my customers look like they're starting to suffer, I have to ask, how long until it hits us?

Obviously, the early-warning signs have already flashed. Forget how fast sales are growing. I'm increasingly worried about getting paid. Rather than merely glancing over the report that tracks how quickly customers are paying, as I would have prior to last summer, today I go through the report line by line, demanding explanations from our finance department for any invoice unpaid after 45 days. Our bookkeeper has responded by peppering delinquent accounts with calls—one customer recently threatened to fire us after paying an overdue invoice—but we can't take chances. In fact, late last year, we fired a customer who hadn't paid on time in months. When they finally did pay, we refused further orders. Not worth the risk.

Deflationary pressures have spooked me, as well. Talk about whiplash: last summer, the price of raw plastic hit an all-time high. Then prices collapsed. One major tracking service says plastic prices fell 30 percent in November alone. Hearing news like this, our customers, under pressure to cut prices themselves by the major grocery chains, began demanding we fork over the savings. Only we were saddled with a large inventory built as a hedge against hurricane-related supply disruptions. So any cost cuts actually just came out of our margins. Now, rivals who've fallen into financial trouble are compounding matters by cutting prices further.

So is it any wonder we're feeling sheepish about increasing our capacity? If this recession does go deeper, and people do stop eating as much prepackaged produce, and deflation takes hold and customers have a hard time paying, maybe it doesn't make sense to spend the $4 million it takes to buy the latest, greatest machinery needed to print on plastic. So we've delayed a decision on new capacity until later this year. Of course, the bank wouldn't mind if we didn't come back to them for more capital, I think. Recently they decided they'd no longer loan against 100 percent of the installed cost of equipment, as they have for years. That means we may have to reach into our own coffers for up to $400,000 as a down payment. And the bank gets the cash cushion should they ever need to repossess and sell a machine.

Not unreasonably, we've begun conserving cash. I've asked our maintenance department not to spend beyond what is necessary to keep machines running, and to police the edict, I've begun looking at the bills again, a practice I gave up several years ago as more demands fell on my time. As a result, we've shaved $50,000 from maintenance expenses this year. I've also swatted down proposals to add more staff, including beefing up the number of janitors, instead choosing to outsource the work. We're also cutting the inventory we carry, with finished goods in storage down 20 percent in just three months.

But the downturn has also unleashed some creativity. Late last year, our maintenance manager called our local utility and asked if there were any new rebate programs to help finance energy-saving investments. If it weren't for asking, he would not have found out about a program that rebated part of the cost of a piece of equipment based on how much energy it would save during its lifetime compared to the machinery it would replace. This led our local utility to recently cut us a $200,000 check toward the purchase of new gas-fired pollution-control equipment, which will allow us to double the size of our printing department, helping us defray 30 percent of the cost.

Of course, in any crisis there is opportunity. I'm on the lookout for troubled companies that might want to shed assets that we could use. Already I know of one company looking to sell a 10-color printing press. Buying a used rather than a new one might help us save nearly $1 million. I've also got an eye out for small acquisitions that could help us quickly increase capacity and chew through our lengthy backlog, which is a good problem to have these days. No doubt things could be worse. Unfortunately, with the economic news getting bleaker by the day, I can't shake the worry that the worst lies before us.

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