The economic environment has become more challenging than ever and for most retailers this means additional effort is required to keep things above water. Now is the time to take a fresh look at every detail of your business, retool your operations to reflect the new realities and, in the process, reposition yourself for a rebound when the economy snaps back.

"Start by thinking of your business as a living organism," suggests Francis Bologna, a CPA and president of Francis Bologna & Associates, a consulting firm in Gretna, LA. "Like any living entity, your business is bound to catch cold from time to time. Your job is to return your business to a healthy state." He continues, "You have to get rid of the fat in your business first. Then trim the muscle and make it leaner, and then strengthen the bone." Bologna explains, "Items on your profit-and-loss statement represent the fat and muscle. Items on your balance sheet are the bone."

Let's take a look at each of these steps in detail.

Step #1: Cut the fat
Your first job is to cut fat from those expenses required to support your business operations.

Telephone
Switching to a more economical plan can bring some serious dollars to your bottom line. "Are you getting the best deal you can from your telephone company?" asks Carol Frank, president of BirdsEye Consulting in Boulder, CO. "Sometimes businesses use the same service plan for years without reviewing their usage."

"Find out if you are maximizing the utility of your phone line," advises Bologna. He suggests using a service called www.multilink.org. This is a call processor that allows fast switching between your phone lines, allowing you to reduce the number of lines. "Maybe right now you have four or five phone lines," says Bologna. "You may have two lines for the Internet, one line for fax and modem and still another for credit card clearing. With this switching capability you may be able to reduce your lines to two."

Supplies
Are you buying everything at the lowest price? Is there a buying group you can get into? There are many Internet services that sell supplies at great rates. One example is www.edealinfo.com, which sells all types of overstock office and business supplies.

Repairs and Maintenance
Calling a repair person every time a machine jams is easy and expensive. "Set up checklists that people can use to do some common troubleshooting before calling for help," advises Bologna. "Sometimes you can fix equipment just by turning it off and on."

Utilities
Electricity and gas are going up. Help stem the tide by finding out if you are getting the best rate you can. Also find out if you are being billed accurately--utility bills are notorious for overcharges. "Take advantage of the many services that will audit your bills," suggests Bologna. "Typically these services charge a percent of the savings they find for you in a given period."

Bonus tip: Spot and eliminate waste in the areas of travel, entertainment, dues and subscriptions.

Step #2: Trim the muscle
Now let's move on to a trickier area: making sure you get the most from every expenditure that directly affects productivity.

Advertising
"Advertising is critical to retail success so you want to optimize it," says Bologna. "Identify and cut the advertising that is not working. And find new ways to generate more traffic using targeted advertising." Try new coupons that invite recipients to visit your studio for redemption.

Beware of cutting too deep. "It's not necessarily wise to cut way back on advertising and marketing," says Frank. Instead, she recommends enhancing what you are doing by touching base more often with your customers and the general public. "Maintain a database of your customers' email addresses and send them an attractive message at least once a month. Offer incentives to come into your studio in terms of premiums or discounts."

People
Because labor constitutes the greatest expense for most businesses it makes sense to continually reassess your employment structure. Bologna suggests taking a close look at overtime. "Is it really needed? Or can you manage time more efficiently?" Also consider a flextime schedule that will allow you to use some part-timers. "Many businesses fall into the trap of employing only full-time people," says Bologna. "Then when the peak period ends they are overstaffed." (See the sidebar, "Ask Your Employees for Help" for ideas on getting your employees to buy into the re-engineering your business.) Trim judiciously. "Certainly you want to look at your payroll and make sure you are not overstaffed," says Frank. "But avoid going in and just cutting people. You will get stuck with insufficient staff when things turn around."

Benefits
Benefits costs have grown substantially in recent years. It's tempting to do away with them but that can be counterproductive in terms of employee disenchantment. "The trick is to modify your benefits without losing the basics," says Bologna. "For example, raise the deductible on health insurance so you can keep the benefit but lower your premium."

Bonus tip: Consider more outsourcing. "The more you can outsource the more flexible you can be in a downturn," says Frank. "You can outsource just about anything." Some examples are janitorial services, information technology, marketing, advertising and human resources.

Step #3: Strengthen the bone
Reducing expenses can help nurse your business back to health, but it won't do the job alone. You also need to address items on your balance sheet that are not subject to cost cutting but can boost your profitability if handled better.

Cash
Here's where cultivating a good relationship with your banker over the years can really pay off. "Ask your banker for an analysis of all your bank fees," says Bologna. "Then negotiate how to cut them."

Receivables
"If you carry receivables there are ways you can get your money faster," says Bologna. "Look into services that transmit check payments by phone, fax or the Web." One such service is www.checkcomposer.com, which will transfer a customer check right into your bank account.

Inventory
A retailer is typically overstocked by the time an economic slowdown becomes apparent. It's too easy for buying habits to get out of sync with customer shopping habits. "Examine your inventory and make sure you have the right amount in stock to maximize your cash flow," says Frank. "If you have too much then it might be time for a sale. Your customers will welcome this in a recession."

Fleet
Do you maintain a fleet for deliveries? Have you analyzed the benefits of buying or leasing your vehicles? And if leasing looks like the way to go have you negotiated the best terms? Bologna suggests using the services at www.leasewizard.com, which will advise you on negotiating techniques given the kinds of vehicles you need.

Serve the customer
Operating your business in tough times, as the experts in this article insist, means retooling your expenses and re-engineering your processes. And the most important process of all is customer service.

"People constantly complain that they get poor service," says Denise A. Harrison, vice president of the Center for Simplified Strategic Planning, in Wilmington, NC. "Have you trained your people in the basics? How do they deal with difficult customers to avoid escalating problems and turn such interactions into positive experiences?"

When the economy slows down it becomes more important than ever to look at the bottom line details of revenues and costs. "If you are not numbers oriented, you have to find someone who is," says Frank. "Retailers who thrive in tough times analyze how every aspect of their operations affects their financials."

Avoid These Three Common Mistakes
Tough economic times can create panic. And panic can lead to unwise, costly business decisions. Here are the three most common mistakes made by retailers in tough times, according to Francis Bologna:

Mistake #1: Thinking expense cutting is sufficient.
"Most business people do not understand the basic premise that you cannot save your way to prosperity," says Bologna. "You can cut a certain amount of fat and muscle, but that is not where the money is. You'll get a bigger payoff, by analyzing your financials above the gross profit line. You must understand that the optimal steps deal with running the joint. Re-examine how you buy, pay for and sell your products. That can make all the difference in the world."

Mistake #2: Cutting too deep.
"The second biggest mistake is chopping a business to death," says Bologna. "It's a mistake to eliminate whole limbs." A retailer, for example, may stop carrying a whole line of products or may fire people to reduce payroll. Such drastic measures send out a message that a business is in trouble. The result? The best people leave because they know they are marketable and the business is left with a mediocre staff.

Mistake #3: Freezing in place.
The third biggest mistake, says Bologna, is shutting down mentally. "Too often a business owner in panic mode stops dealing with issues and procrastinates on important decisions," says Bologna. "Employees and customers start hearing 'I'll get back to you' a lot." Don't make that mistake. "Stay an entrepreneur," says Bologna. "Be fast and durable. People read that as being sure of yourself and knowing where you are going."

Look for New Opportunities
When exploring ways to retool your business for challenging economic times, don't neglect to look outside the box--that box being the four walls of your store. Are you responding adequately to changes in the demographics of your market? "A down cycle is a good time to assess where your sales are going and if there is an emerging market you have not seized," says Denise A. Harrison. Can you direct new marketing programs to retirees, the affluent or ethnic communities in your area? "Watch who is coming into the store. Keep your eyes and ears open to emerging trends and capitalize on them by focusing on a target."

Ask Your Employees for Help
"It's smart to openly discuss a changing economy with your employees and get them aboard the retooling team," says Denise A. Harrison. "Ask employees for ideas on ways to cut back. Sometimes you can go to employees and say 'We need to cut our labor costs by 15 percent.' Rather than get rid of folks we can reduce everyone's workweek from 40 hours to 35. If everyone takes a cut we can keep the whole staff and there will not be losers and winners."

Other times you can turn a negative into a positive. "Ask if anyone would like a leave of absence," suggests Harrison. "Some people just want to take three months and go travel because that is something they never had time to do. Or maybe someone has a child who is playing a sport in the fall. That person would actually like to take a three-month break and focus on this." Look for creative ways like these to reduce labor costs. Be careful to not cut so deep you lose valuable skill sets. Hiring your best people back when the economy turns around may not be as easy.