Monday, September 15, 2008

How to Survive a Recession

With the recessionary storms gathering pace, this week I am offering my advice, based upon hard earned experience of having endured two previous recessions, (one in the 90's in the UK and the '.com crisis', ten years later). To aid focusing on the key issues, I have constructed a framework of four ‘A’s’to explain the survival process: Anticipation, Analysis, Action and Attitude. (But first the introduction):

I find it incredible how many financial advisors and so called 'experts' are saying how unpredictable the current recession was, it is as if there was no warning. Anyone who has lived for more than forty five years either in the UK or the US should at least be thinking ‘I wonder how much longer this property boom can last’?

Every eighteen years or so, the banks get into difficulty and new regulations are brought in to ensure that ‘nothing like this can ever happen again’. I admit, this time its on a much bigger scale, but the principles remain the same. The bottom line is, in the financial world, the traders and low level decision makers are only looking at the situation immediately infront of them, at their daily, weekly and monthly performance figures. Little wonder that things go wrong when the deals they make effect the long term strategies of the businesses they invest in. This time, like the last, it is the ordinary mortgage lender that felt the hit first and, in turn become the catalyst that drove the current economic downturn. But having said all this, it is time to get to the point and to our area as business leaders where we have some influence.

A yachtsman sailing solo around the world knows only too well that the beautiful balmy day he is enjoying, relaxing in the sunshine on the deck, can not and will not last forever. Take a look around his yacht and you will see water tight hatch doors slid into the open position and everything he needs to weather a mighty storm, neatly tucked away, just out of sight but within easy reach. In the galley are tins and tins of provisions that every sailor hopes that he or she will never have to eat.

For the last decade or so, year on year giant loses are announced in the automobile industry and one wonders how these losses are sustained? The answer lies mainly in provisions. Just like the yachtsman, companies with the desire to survive, put aside, in the profitable years, a provision (upon which they are prepared to pay corporation tax), in order to bank for a rainy day. The amazing thing is – why don’t more companies do this and especially small ones? One theory I have is that accountants are so focused on guiding companies to reduce their taxation liabilities that the owner conveniently interpret this as ‘it’s better to spend every dollar you earn than ‘give away’ tax to the taxman. The result is one finds oneself surrounded with useless acquisitions that if truth be known add little or no value to the core business.

Currently there is a 4% downturn in the retail industry and everyone is running around like headless chickens acting like it’s the end of the world. If your business cannot sustain a 4% downturn for a short period, then you might as well ask yourself how is this possible? Some say that shareholders are to blame, wanting every cent possible as a return – but this is not the only story. The trouble is when things are going well we make out it is down to our wonderful leadership and of course when things are going badly, we make out that it is obviously down to ‘the recession’ and we spend our days trying to identify other companies in a similar position to comfort and justify to ourselves that we are not the only ones in trouble!

So what are the four A’s for surviving a recession? (the first might be too late for many, but don't be downhearted and read on anyway)

• Ensure you have sufficient cash reserves to weather it out (anticipate a sustained downturn, a period of no profit and or moderate losses, for at least 24 months).
• Look for the warning signs, trust your logic and instincts – (eighteen years of unbridled growth and massive house price inflation, should be a good start).
• Compare bad years with good years - Ask your accountant for a copy of the financial results for the last ten years (If your company does not go back that far, ask for the results of the best year so far) compare the results with now, check for the good year:
o Who were your clients?
o Why did they choose you?
o What service or products were you supplying?
o Where did the profit come from?
o What has changed since then?
o Who are you core customers today?
o Which customers are the profitable ones?
o Why are you spending energy on non profitable activities (ego tasks)?
o How much longer will your cash flow last if you carry on with the burn rate you currently have?
• Ensure that you react quickly. Like the yachtsman, batten down the hatches in time, don’t hang around on deck pontificating, better be safe than sorry.
o Cut back on all surplus expenditure
o Cancel all purchases that are not signed and/or not 100% linked to your core business
o Cancel all non comitted business deals that are not profitable and could eat up valuable cash reserves
• Look up the word ‘prudent’ and learn the definition off by heart, get your staff to do the same
• Increase your networking activities, do it with a purpose. Go back to the basics: remember your elevator pitch from the good old days. Adjust the words, change the context, if need be, but retain the original focus and passion.
• Do not panic into making ill thought through marketing decisions
o Avoid sudden changes of direction. (Brainstorming crazy new business saving ideas are probably the very actions that will kill you, if they are ever implemented)
• Extend your credit lines before you need them extending.
• If your luck turns with one good deal, never think your problems have gone away
• Prioritize your payments, pay only those that simply must be paid and hold back on all the others for as long as you reasonably can.
• Focus your energy on what you do best and encourage your staff to do likewise
• Try to remain positive but keep an air of realism
• Consider bringing in an interim manager to do a 30 day quick scan of your business to find the areas for improvement that you might have missed – there can be no ‘holy cows’ here.
• Sell assets that are surplus to requirements, but find the right buyer and do not under value them, no matter what the ‘experts’ say, most are out to rip you off and probably have a buyer in mind and will make the margin that could have saved your business
• Do not sell the tools of your trade, without them you are finished
• Make sure your cash reserves are in a safe place where they can be located quickly and without interference
• Try to remain positive but keep an air of realism
• Politeness, clear thinking, discipline and control are the four most important attributes you need to get through.
• Never say die unless the balance sheet tells you too and then get out in time

1 comment:

Bertrand Potier said...

"value for the core business", Indicators and Feedback Loop.

From financial markets to our companies and projects, I'm usually surprised to shocked by how limited the vision of most actors is. By relying on short term indicators (a.i. the day to day value of a stock market), I see many analysis and decisions being made based upon a very limited knowledge of the longer terms effects, benefits and added value for the core business indeed. Some would call it instinct, prediction skills, urgency or else but I feel it's more being related to laziness, a lack of conscience and sometimes business or human ethics.

Indicators are key, short AND long term ones and consequently, so are tools and efforts spent on projections: estimating the costs and benefits at the term (of a contract or project). Without indicators, no measure, without measures, no feedback loop and corrections possible. The key consequence of this is deviations, usually increasing ones till the thresholds and limits of the considered system are reached and the crisis / crash occurs.

The feedback loop principle is the most basic principle of automation of mechanical and numerical systems. Without them, there's no real control and "run with increasing risks, crash, patch (eventually) and reset" becomes the standard way of operating.

Thanks for these tips, let's hope for more "Measure and Anticipate" in the future