How to Handle the Current Economic Tumult

Multibillion-dollar institutions have failed in recent months and your little business is still standing. So is mine. Keep this in mind when you start to worry. Consider the following as you think about what this all means for your survival.

Let them fall. Darwin was right. It's survival of the fittest. It's the law of nature. The strong and adaptable will survive. The weak and unfit will perish. Let the weak fall. Don't let it rattle you. Stay focused on your own survival, on becoming stronger, faster and more essential to your customers.

Diversify. Lack of diversification (and high debt loads) brought down Bear Stearns, AIG, Washington Mutual and others. Too many assets invested in nonconforming residential mortgages and/or too much borrowing of auction-rate paper. You never know which investments, assets, financial sources, markets and relationships will implode. All you can do is stay diversified in all aspects of your business.

Stay Light on Leverage. High leverage (i.e., debt) also contributed to the recent bank and financial institution failures. Almost all bankruptcies are the result of too much debt. Debt adds financial risk. It makes you more vulnerable to downturns. To be sure, debt capital is needed at times to expand and get higher rates of return on equity. But use it with caution and moderation.

Count on Change. Things never stay the same. The pendulum is always swinging. Keep this in mind. These poor economic times will not last forever, so don't panic. Similarly, when times are good, avoid making decisions that assume the good times will always grace you and your business. They will not. Stay cautious and maintain a margin of safety. This is one of the core maxims of the greatest investor of all time - Warren Buffett.

Don't Make Decisions Under Pressure. Financial turmoil causes stress and confusion. Scammers and persuasive, cunning salesmen and dealmakers will try to use the stress and confusion to get you to agree to things that will line their pockets and empty yours. Don't make decisions during these times. Don't let someone "get in your head" and use scare tactics. When you feel the pressure, step back. Take some time and seek advice.

Be a Low-Cost Provider. Businesses fail when they run out of money. Businesses that last for generations are frugal. They spend money only on necessities that provide a return. Flaunt your wealth on the bottom line, not on shiny things that don't add value to your business or your customers. Seek to reduce your cost of doing business and expand your gross and net margins.