Recession planning strategy:
Do the shapes of our bottoms matter?

This is David's bottom. What shape is yours?An appalling truth is now dawning on us: the shapes of our bottoms seriously affect our lives, sometimes casting big shadows over the way ahead. And denial is dangerous when it comes to recession planning; ignoring those shapes, or pretending they don't matter, can lead to disaster for business-owners.

On 22 October 2008 the Governor of the Bank of England declared that the UK is entering recession and it was promptly confirmed that the British economy shrank in the preceding quarter. So we moved from navel-gazing, about whether the credit crunch would be followed by a downturn, to staring at the bottom ahead of us (or below us), and wondering whether it will be V-shaped or W-shaped or U-shaped.

If your bottom is V-shaped, you expect to bounce back quickly after a fall. If it's W-shaped, you fear a rebound will only be followed by another fall. And if your bottom is U-shaped, you expect to be unable to get back on your feet for quite some time.


In the V-shaped recession scenario:

Concerted government action to rescue the banks does the trick. The International Monetary Fund (IMF) quells queasiness in a few emerging market economies. Then interest rate cuts, falling inflation and Christmas combine to coax confidence back into the battered markets, stimulating fresh growth from the lamentable lows of October 2008.

In the double-dipper or W-shaped scenario:

A V-shaped recession scenario is followed by a further sharp setback, perhaps due to emerging market instability and/or renewed oil price rises as Opec cuts production and/or inflationary pay demands.

In the U-shaped scenario:

Double dipperTrouble rumbles on and on. Emerging market lending goes sour on a spectacular scale and the banks get hammered again. Needing profits to restore their capital, banks do not pass lower rates on to borrowers, so business failures and repossessions continue to rise against a background of weak demand. It takes years for recovery to arrive.

Because some businesses thrive in a recessionary environment which is bad for many others, our bottoms are different.

Recruitment agencies specialising in temporary workers, for example, are experiencing a boom as other businesses go bust. They are pursuing Business Improvement and company sale as if their futures were bright, because indeed they are! So recession planning must take into account the peculiar features of your own business.

Most of us, however, do not have anatomies which look aerodynamic under current conditions. Any responsible recession strategy must then include some form of recession-proofing programme.

Retirement on the cards?

Furthermore, if selling a business is on the cards due to retirement or the need to shed non-core assets, it's better to bite the bullet (facing the pain of not having done it earlier) and get it done sooner rather than later, when values achieved for a business may well be worse. By the way, owner-managers wanting to sell a business need to remember that buyers may insist on strapping them in, to see through integration with a handover period of a year or two.

Ignoring the shape of our bottoms is dangerous because we risk committing ourselves to action out of kilter with reality. For example, if we deny the possibility of a prolonged downturn and cling to the hope of a V-shaped bounce back which fails to materialise, we run the risk of doing too little too late to stave off disaster for our businesses. Conserving cash and raising capital only ever get harder as a downturn worsens.

On the other hand, if we hunker into a bunker for the long term, we are likely to miss the market share gains achievable by competitors who call the timing of the trough right and get out early to capitalise on growth opportunities as soon as they arise.

Fresh fortunes will be made by business-owners who stay focused and are ready for the upturn.

Shield Corporate Finance suggests that owner-managers look at their recession planning strategy by making contingency plans for several scenarios, rather than only planning for the worst, and thereby helping to bring it about. After all, since it's so time-consuming and expensive to rebuild good teams, you don't want to lay them off if you can possibly avoid it.

But it is because the greater risk lies in failing to prepare for the worst that serious recessions have a self-fulfilling dynamic about them. All too easily a collective crisis of confidence sets in, cascading through every area of the economy and every region of the world. And globalisation has gathered us into the same boat, much more than most of us had realised.

Certainly the emerging consensus seems to be that Western economies will be flat on their backs for at least a year or two, so we'd better prepare for the worst. Already in mid-September 2008 an IoD survey of 1,114 UK businesses showed that almost four in five of them were cutting back on expenses.

In October 2008 at the World Business Forum in New York, former General Electric CEO Jack Welch said, "We're in a recession and I don't see a V-shaped recovery - more like a bathtub U-shaped recovery, which will last deep into the second half of 2009. The fourth quarter of 2008 and the first half of 2009 will be brutal." Welch advised CEO's to cut costs immediately and "get it over with sooner rather than later."

Even UK Chancellor of the Exchequer, Alistair Darling, will say this week that the economic crisis will be deeper and longer-lasting than the government first predicted.

Given what the world has just witnessed, it is hardly surprising that recovery may take a while. The bursting of the property lending bubble on both sides of the Atlantic brought asset price falls and a credit seizure that almost destroyed the global banking sector. So the banks have been crippled just when we need them to help deal with a steep cyclical downturn that is long overdue and exacerbated by high prices of food, natural resources and energy (notwithstanding the oil price fall of the last three months). The spectre of unrecoverable bank lending to emerging market countries is now compounding the gloom.

Many business-owners have faced, or are facing, financial losses that feel catastrophic. We are having to deal with big blows to our financial security and will have to work longer and harder than we expected. These are testing times. And in times like these we find out what are the things on which we have been basing our confidence.
But we will only make matters worse if we succumb to despair.

Crisis brings opportunity.

At all levels (international, national, corporate and personal) we can and must look anew at what we are doing to see what we need to do differently. And if we are willing to learn from our past mistakes, the changes we make now to the running of our businesses may sow the seeds of future blessings greater than anything we are currently able to expect or imagine.

To find out more about recession planning, contact us.  

© October 2008 Shield Corporate Finance


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