Costs, inventories, optimism pared.(Chicago Tribune)

By nature, small-business owners are an optimistic bunch, adept at thinking on their feet as they fend off bigger and better-equipped rivals.

But even the most assured entrepreneur heading one of the nation's 5.8 million small firms would be hard pressed to deny that 2002 promises to be a test of character and leadership skills.

"These unpredictable times require particularly solid navigation and leadership skills on my part," says Lawrence Hollins, president of The Hollins Group Inc., a Chicago-based recruitment firm that employs 15. "There's nothing in the playbook that tells you what to do during the current uncertainties."

Yet most small firms have taken a few common steps to help cushion the worst effects of the softening economy. Many have focused on conserving cash by reducing operating costs, which has resulted in cuts in inventory and capital spending.

More of the same is expected over the coming months as firms search for new business and policymakers struggle with how best to provide assistance.

In each of the past seven months, more small firms have cut stock than reported accumulating inventory, according to the …