The last 12 years have been “interesting” from a business perspective: the highs of the boom in 2004-2008, the mega fall into recession in 2008-2010, the stagnation of 2010-2014 and the slow but steady growth to date. However, the stock markets had a turbulent start to 2016, with the fall in oil prices, the slowing down of the massive Chinese economy and worsening international relations, leading some experts to believe that a new global recession could be brewing. These fears have been compounded by the recent Brexit vote, which has impacted on stock markets and currency in the UK. It is probably safe to say that there is some turbulence ahead.
Recessions are normally the business equivalent to nature’s autumn and winter. It is the time things die off, cut back and regroup in order to grow again. During the boom years, successful businesses become over staffed, costs get out of control and careless deals are done, resulting in companies that, whilst looking good and profitable from the outside, under the surface are relying on constant economic growth to hide their weaknesses. The advent of a recession means that there is then a need, reason or excuse to focus on fixing things internally to keep afloat, rather than sailing along on the tide of external growth.
While during past recessions, we have seen high levels of staff lay-offs, a rise in unemployment, major falls in house prices, business closures and insolvencies, in the last recession we saw little sign of these effects, especially in the South of the UK. So why was that, and what does it mean for us business owners?
I see two reasons for this. Firstly, the recession happened over a long period, so companies had time to react. Yes, the property sector was hit the hardest and earliest last time round, but since then, companies have had the opportunity to take stock and make the necessary cutbacks in their own time.
The second reason is that insolvencies are normally caused by external factors; namely, action by large creditors, banks and the tax man. However, with low interest rates, the loss of reputation of the banks themselves, new sources of internet-led funding, such as peer to peer and crowd funding, businesses that would have gone bust in previous recessions were given a life line to get them through the tough times.
Now this would be great if all the businesses that survived were good businesses, but many were not, and the fact that they did not go bust is a worry, because these businesses hold the resources that the good businesses need to utilise to grow. They are still employing good people, they are renting good properties, they are using up credit that the banks could use elsewhere.
The result of this is that you will have to offer higher wages in order to tempt good people away from these businesses to work for you, rents will increase as there are not enough good sites available and bank interest rates will rise to compensate for this apparent rise in inflation. On the plus side however, sales opportunities will also increase but this is a double edged sword, as the additional working capital will need funding.
Add into this the fact that suppliers, banks and government will start to feel more bullish and begin to lose patience with those that are not repaying their debts. The result will be a steep rise in businesses being forced to close. So knowing that this is going to happen, what can you do to ensure that you are not among the businesses that are going to fail?
In my opinion, there are 3 key things that you need to focus on in the next 12 months to ensure that you are ready to weather whatever economic situation you may be faced with:
- Understanding your true financial position. Are you really sure you know exactly where you are – your profitability per product/service line, your cash-flow, debtors, creditors, operational efficiencies, sales and marketing key performance indicators. If you have delegated this task to an employee or outside agency then make sure you oversee and review it on a regular basis. Remember, the buck always stops with you.
- Knowing where you are going. You must have a 5-10 year goal and a plan to get there. If not, then you are going to be slow out of the gate, miss the opportunities and find yourself no further forward in 5 years than you are now.
- Making time to work ON the business not IN it. You have to step back from the business to see the bigger picture. In a recession, it is OK to roll your sleeves up and get stuck in, but if you keep on doing this, there will be nobody steering the boat and you will find yourselves on the rocks.
One final thing – not all companies that will go bust when the next recession hits will be bad companies. Good ones will go as well, but only because they did not try to be better. As Tiger Woods said, “No matter how good you get, you can always get better.”
So go on, take ACTION, and ensure that your business is ready to face the future, no matter what the economic climate.