By Andrea Coombes, MarketWatch

Last update: 7:01 p.m. EST March 4, 2009

SAN FRANCISCO (MarketWatch) — Small companies are suffering as much as larger ones in this global financial crisis but some small-firm owners say they're ramping up sales even as they're forced to rethink how they do business. Of course, just as Lehman Brothers, Circuit City and other household names have imploded in recent months, some of the 26 million small businesses in the U.S. likely won't make it through this protracted economic slump.   In a tough job market like this one, laid-off workers often try to transform themselves into entrepreneurs. But does it make sense to launch a startup during a recession? Fred Ackerman should know: He founded his travel company, Black Sheep Adventures, during the last downturn in 2002. MarketWatch's Andrea Coombes reports. While 60% of small firms said it's unlikely the financial crisis will force them to shut their doors, 22% said it's somewhat likely and 14% said it's very likely, according to the February Discover Small Business Watch, a monthly survey of 1,000 firms with five or fewer employees conducted by Rasmussen Reports for Discover  

Financial Services.  

Fifty-four percent of small firms said they see conditions for their business getting worse, and 42% of small firms said they had temporary cash-flow issues in the past 90 days, according to the survey.

Still, many firms are optimistic. "For a lot of us, things are not nearly as dire or grim as they are in the evening news," said Martin Simenc, president and founder of Home Safety Services, a seven-employee firm in Foster City, Calif., that installs safety features to protect children and improve accessibility for seniors.

 Certainly, sales have slowed, Simenc and others say. But for many, business continues to grow, albeit at a lower rate. "We've got some favorable things on our side because of the demographic we're serving, particularly on the senior side of the business," Simenc said.  

Change the message 

Still, business owners are being forced to adapt to a profoundly different economic mood, said Victor Cheng, author of "The Recession-Proof Business" and a San Francisco-based executive coach.

 "When the economy contracts, money is still being spent, but it's being spent for different reasons," he said. Tapping into that change "can be as simple as changing how you communicate how your products are relevant," he said. For instance, the owner of a massage therapy business should focus on "stress reduction" today, instead of "pampering."  

Adapting to change is what Tobi Skovron is doing. The chief executive of Pup-Pee Solutions, a Melbourne, Australia-based maker of pet products, knows consumers aren't shelling out for luxuries. Skovron said he now makes a point of promoting his main product — The Pet Loo, essentially an indoor "bathroom" for dogs — as a pet owners' necessity, particularly for apartment-dwellers or pet owners who live in severe winter climes.

The downturn is an opportunity, he said. "There are established distributors going out of business all around the world and retailers are looking for new suppliers. We're there to catch that business," Skovron said.

 Another strategy: He's made it easier for retailers to order his product by eradicating minimum order requirements, letting them buy just one at a time.  

It's almost easier to be a small firm in this type of economy, he said. "If we were doing revenue of $100 million, to keep or maintain that revenue stream in a down market is difficult. For us as a young growing company, if we push out an extra 5,000 units on top of our expectations, which is still not hard, it's growth for us. We really haven't maxed out on all of our opportunities," he said.  

Others agreed. "Frankly, we're kind of in a growth mode," Simenc said. He's hiring field personnel and sales support. Why? "One, it's a little harder to come by the business — you need more emphasis on that side," he said. "Two, there is such a good talent pool out there available right now. It makes it real attractive to be recruiting at this time." See story on small businesses hiring.  Keep costs down 

Holding costs down is important for small firms in any economic climate. Rethinking your assumptions can help with that goal.

 The owners of PlanetMomTshirts.com want their product to get to consumers quickly, especially during important gift-giving holidays. After trying other delivery services, they realized the U.S. Postal Service was their best bet.

 "It costs 50% less than UPS and FedEx and often gets to our customers even faster," said Eileen Schneidman, co-partner with Elise Nappi in PlanetMomTshirts.com, a Fairfield, Conn.-based maker of T-shirts sporting witty, parent-focused phrases, including "Whine? No. Wine? Yes."

 Also, Schneidman said, they've rethought advertising. Rather than paying 35 cents a click at one gift-focused Web site, they now advertise on an 18-cent-per-click site while, separately, emailing hundreds of bloggers who write about parenting. "We'd tell them about our shirts, invite them to our site, sometimes send them free shirts," Schneidman said. "The word got out that way, and on our end it was the cost of a shirt."

 Another cost-saving solution: Work at home. "We had looked at opening up an office in the area," she said. Instead, they stayed in their home offices.

Working with workers 

Even as larger firms slash payrolls to cut costs, some small businesses are doing their best to hold on to workers, out of a sense of loyalty but also with an eye on the future. Cutting payrolls too much can cause problems when the economy turns around.

 A.Y. McDonald Manufacturing, a Dubuque, Iowa-based maker of water-system parts and plumbing valves, has instituted four-day work weeks and offered voluntary temporary layoffs in recent months.

 "We have done a whole host of other things to manage the slowdown, but currently we're still trying to manage it without layoffs," said Chad Huntington, the firm's vice president of human resources. The company, which employs 342 people, recently won a Principal Financial "best practices" award for its benefits programs. Read more about the award for small firms.

 "For us to even consider doing a permanent layoff and having to try and find more workers when things get busy again is going to be extremely difficult," Huntington said. "We really want to be careful that we're well positioned when things do return."

 In business for 153 years, A.Y. McDonald has seen downturns before. "We managed to survive the Great Depression without a single layoff and we're certainly hopeful and working aggressively to survive this severe business softening without layoffs as well," he said.

 Diversification

 Branching into new niches also helps companies survive. Carl Svensson, chief executive of Foster City, Calif.-based Powertronix Corp., said that, while medical-technology companies drive about 50% of his sales, the increasing national focus on wind power is fueling growth at his company. Powertronix makes custom-designed power supplies and transformers.

 "Wind power right now is a very big growth area," he said.  

But he's also paying close attention to receivables — "We have people calling and making sure we get paid in time," he said — and ramping up sales efforts, including hiring more sales and support staff. "We're intensifying our market and sales activities. We have more people right now calling on customers, visiting customers," Svensson said. The company has 15 employees now, up from 12 a year ago.

 Simenc of Home Safety Services is ramping up the senior-focused side of his business. "Over the past couple of years, we've grown the senior side much more significantly," he said, in part because "the child-safety side is more discretionary."  

Meanwhile, A.Y. McDonald, the waterworks maker, is boosting sales efforts on a product that helps municipal water departments more accurately measure — and charge for –customers' water usage, with the thought that cash-strapped cities in drought-suffering states will be interested customers. The company's efforts include hiring a new product manager.

 That's a sensitive step in a company asking employees to consider voluntary layoffs, so Huntington said he talked to production workers about the job posting. "We expressed the fact that we don't see the market rebounding any time soon, that we're curtailing hiring and replacements," Huntington said, "but this is one we absolutely need in order to capitalize on opportunity in the downturn."  Expert advice 

In worrisome times like these, isolation can be difficult for small-business owners. To counter that problem, Svensson of Powertronix and Simenc of Home Safety Services are members of The Alternative Board, a business consulting firm offering fee-based access to monthly "board" meetings with other local owners to discuss strategies.

 Simenc said the participation helped him better assess his company's outlook. In board meetings and seminars, owners were encouraged to assess their companies' strengths and weaknesses.

 "Are we going to have cash flow to support staff if revenues take a significant downturn?" Simenc said answering such questions eased his mind. "If things do go south, in our particular case, so many of our costs are variable, it won't be as happy of a time but we'll still be very viable."  

Andrea Coombes is an assistant personal finance editor for MarketWatch, based in San Francisco.