Well, it's a rainy day. Now What?

A Lot Can Happen In A Week.

The 'Deripsaka Affair' momentarily took our eyes off the bad news. Today's Times tells us UK borrowing will rise to £60bn as Tax Revenues are predicted to collapse. Why do the laymen fraternising bars know more about the economy than Chancellors, reporters and City financiers? Pick a random pub in Britain 2 years ago and the sage sipping his pint would have told you a) house prices had risen way beyond all means to pay as had credit card credit which would end in tears and b) a recession will hit soon enough which will mean high unemployment, a higher burden on the state, less corporate profits and therefore less tax collected - so a hole in tax revenues would occur. And mine's a lager.

Doom and gloom is suddenly upon us now that 'Mr. Prudent Brown' has finally succumbed and uttered the 'R' word - Recession. In the last quarter UK GDP shrank by 0.5% and worse is predicted to come, indicating a technical recession. I almost sighed a relief that at least we can now prepare for it having admitted it, like a drunk facing their addiction at last.

But just a week ago, most people I met suggested their business was still doing well, and no downturn had been seen.

This week, one of my own clients failed to secure their next tranche of VC Funding mainly as the pot was empty as the VC was Hedge Fund-fuelled. Almost like an avalanche, bad news kept coming in.

The Bad News Keeps Coming

Mervyn King, Governor of the Bank of England, delivered his annual Financial Stability Report, you know that stability Mr. Brown talks of for the last 10 years. Well it went a bit wobbly. Last week, King announced the banking system came the closest to collapse since World War I and that it was due to 'Systemic Failure' - advice he could have got in any of the last 5 years in my household but he's only paid to do his job. He estimated the total loss in the Banking System is around £1.8 trillion and so far globally Governments have consumed £750 bn in bail outs (I think his sums are wrong personally). The litany of failed banks is long - RBoS, HBoS, Lloyds TSB, Northern Rock, Bradford & Bingley, and Barnsley Building Society in the UK have old gone into partial or total public ownership exposing the tax payer to hundreds of billions of potential liability. In Iceland, there was a total failure of the country's banks as credit was denied them - pushing them to meltdown while they held over £1bn of UK public money plus private savings - the country itself almost went bankrupt. In the US we saw mortgage giants Fannie Mae and Freddie Mac go public while Lehmans popped its clogs, Merrills got bought, AIG was rescued twice.........oh I am depressing myself.

The UK housing market according to Nationwide will lose more than 25% of its value and reading different reports it will mean between 1.2 and 2.5 million mortgage holders going into negative equity. The market, it's predicted, will not recover until 2013. A little factoid for you, as the UK house builders quite literally hit a wall, less bricks were made for the UK market this year than at any time since 1945.

Unemployment is fast approaching 2 million and estimates say that it will reach 3 million before it gets better putting another huge burden on the State - it is now higher than when 'Prudence' Brown took over, as indeed is inflation which at its highest for 16 years, so much for puny targets.

As we contemplate the interest payments on the £400bn bank bailouts and cheer Mr. Brown for ensuring that not a UK deposit of savings was lost, he tells us that borrowing more to pay for all this and increasing public spending is actually the right way, as his well-worn Keynes book tells him. The borrowing that independent bodies like Ernst & Young, the IMF and OECD have told him was way too high 5 years ago, that is. This year's Government target, which will be 'robustly' broken like all their fiscal make-believe, was £38bn. If the predictions are right, very shortly it will not far off be double that and it goes way beyond 50% of our GDP.

Britain is being mortgaged in a major way. If our debts were called in, each taxpayer would approximately owe the Government around £50,000 whether you were able to pay or not - around the same for the US.

And the Banking issue is not yet resolved as the Stock Markets indicate. The FTSE 100 is now down at around 3800 and still shows signs of frailty while the pound is at a 5 year low against the dollar - a sharp fall in less than a year of around 42 cents. It is estimated around $535 trillion of open derivative positions, those nasty money-making vehicles at the root of our problems, exist and to put that into perspective that's a mere 35 times the US GDP. Oh and there's a further associated $400 trillion of insurance positions to account for.

China, that bastion of emerging economies, is also slowing as demand for their cheap goods which account for over 70% of their GDP, slows dramatically. Retail sales, which have held up remarkably well, dropped by 0.4% in September and shops predict the worst Christmas buying period for years. The pound drop means a hop to New York for Xmas shopping in the Thanksgiving Sales simply is no longer worth it, while cheap French booze is no longer that.

The good times really are over.

It poses all sorts of questions about how we should have avoided this and that all this 'Global Crisis' affecting the UK as if we were not part of the problem being hokum - but that really doesn't help the small businessperson, trying a) grow or b) survive recession now that we have it.

Any Good News?

Today BP announced $10bn PBT for the last quarter and oil prices have shot down from a peak of $147 to $62 per barrel which at least makes fuel cheaper at last.

And that's about it.

How To Survive

Enough with the gloom - we have all seen the Sequoia Presentation on the web which it presented at its All Hands CEO Meeting for its protege companies, well there was some sound advice for us all, if most of it was simply presenting the financial predicaments graphically for those who couldn't read.

Last week I made a presentation to a group of Entrepreneurs and while I focused on some common business weaknesses for small or emerging businesses, gave some tips on how to expand their networking (which I have blogged on before), I also gave my tips on how to survive a recession. So here goes - it isn't exhaustive and it's deliberately simple:

• Common Areas of Business Weakness

1. Wishful thinking - most businesses see their future they way they would like it and a lot is rose-tinted. Recession hits most businesses in some way or another and its best to acknowledge it will hit and have some impact. Plan for it and don't deny it.
2. Understanding the Sales Cycle - most emerging businesses think that sales will occur naturally and that once the light bulb goes on, companies buy. The fact is, the bigger the company you sell to, the more lights need to go on and usually that means more people resort to process to buy. If you think your sales cycle is likely to be 3 months, double it for larger companies and then don't be surprised if it's longer. Further, if your product or service is synonymous with the 'Good Times' so is a nice to have not essential, it is highly likely that in recessionary times companies will simply not buy. Think about how your product impacts the bottom line and reassess your 'Value Proposition' to customers - I will address this separately. Remember, sales is a game of numbers - the more people you meet, the more likley you are to increase sales. Similarly, don't rely on a few large customers, spread the risk. If one customer suffers a downturn then you are more likley to survive unless you wholly dependent on them.
3. Spending Money in The Wrong Areas - many small businesses don't think through the impact of cost or capital spend on their bottom line. In recessionary times Sequoia tell us 'To spend every dollar as if it was your last' which is pretty scary but the maxim works. Think about every detail of spend and then test it against the benefit it directly produces. If it does not stack up, don't spend. Reassess all current spend and look to see where savings can be gained as cash is absolute king - the last thing you should be doing in a recession is increasing borrowing for working capital, and banks will not support it.
4. Assumptions - 'are the mother of all evil' - well that was my invention. At any time, we all make assumptions, particularly in forecasts. Recessions are horrible beasts, they actually ruin forecasts because one minute all the numbers and graphs look great and the next they all go red and point down. Gordon Brown made a whole lot of assumptions and his continual denial to himself that the growth in the country was unsustainable cost us all an enormous amount of money and liability to pay for his damage. We are his lifeline, his collateral or assets to save his neck and the country. It doesn't work like that for small businesses - you get your assumptions wrong and there is no-one to bail you out. So acknowledge recession, think about its consequences in your market and start thinking about whether your assumptions and forecasts actually reflect what could happen. Remember should you 'hit the wall', no one is going to believe you if you predict for a few pounds more, the graphs will again go up and figures go black - reality is really a swine.

It's all about balancing Optimism with Objectivity

The Value Proposition

Picking up on my theme above, companies in recession will buy only against certain criteria. Like you they will not buy products or services which do not impact the bottom line and they will be rigorous on this.

All sorts of reality bites. As a for instance, if you are in recruitment, as unemployment goes up and open headcount goes down, the competition for every open position increases dramatically and once again we will see what on earth value is there is charging 30%+ of salary as fees for searching keywords on CV database? Differentiation is critical and track record is worth not a jot in a desperate market. Cost is king.

The Value Proposition in a situation like this is critical. How can you deliver more value versus your competition and so justify your cost? Remember it has to have a direct effect on the bottom line. For those who want an answer to that question, I have a free download on my website www.calxeurope.com which gives some ideas entitled 'The Cost of Bad Recruitment' - the Value Proposition for customers and recruiters alike is highlighted in there.

And so for all other businesses, think about what extra you are directly delivering to someones bottom line and why - quantify it. At this point, my thought is do not get hung up on the competition, but focus on each customer and tailor the Value to them specifically. Give examples of those successes and ask existing customers to talk on your behalf or give testimonials. Think about what impact does the customer have if they do not buy from you? Quantify that and think about a specific timescale when that benefit is either lost or gained - a 'Compelling Event' if you like, the D-Day of increased cost for not using you.

In a recession, your biggest competitor is 'No Change' - make sure you tailor your Value Proposition to answer that specific situation and remember customers will buy but only demonstrable value.

Keep Flexible - Put The Workforce Where It Is Needed

• It's usual to contract out payroll, cleaning, accounting, even manual labour but what about sales and marketing?
• There is a huge, experienced labour market already out there - guns for hire.
• They can be used at short and long notice to augment your efforts.
• These people are not employees and they live by their results and reputation, so they always go that extra yard to succeed and deliver.
• They can be paid more inventively, highly geared to results and even made part-time. It's a 'Pay as you go' culture.
• More importantly your needs change constantly, one week you may need telesales, the next face to face experience - pay for what you need, when you need it. Similarly in marketing, one month you need copywriters, the next web maintainers or designers - pick and choose the expertise and apply it when and where you need it.
• Negate onerous employee obligations and costs. While daily rates may seem higher, you only pay for what you need, when you need it.
• Be adaptable - pay for the skills you need as you go.
• Pay for experience as you need it.
• Pay for geographic reach as and when.

Pay for what you need, when you need it - be flexible, lean and mean.

Recession Beating Thoughts

The Sequoia Presentation highlights some key thoughts for small and emerging businesses and here's my take:

• Focus on costs - evaluate 'return on every cost'. Don't keep spending just because it's in the budget. Review, reforecast and adjust spends in all areas. And do it now.
• Be Realistic - Make the tough calls now. Recession is ugly and forecasting and adjusting is vital. That will inevitably mean review of major investments, projects and even people. Make the tough calls now. When the recession as at its hardest or even beginning to ease, it is not the time to be making tough decisions on cost because it is very unlikely that your finances will be strong enough to take advantage of the upswing. Of the last 6 major downturns, the markets have recovered - so make sure you are thinking about weathering the storm and the upswing and that means make tough decisions beforehand rather than after.
• Budget to Survive - There is no point thinking the position you are in now is going to last. Everyone will get affected in some way, there will be even some who benefit. Sit back, reforecast and budget to make sure you survive rather than being hopelessly optimistic in the face of the obvious. Now is not the time to be embarking on major programs of investments or new projects which do not have immediate returns.
• Pay for Results Not Failure - Make sure all staff are joined into the position. Recently Caterpillar saved 300 jobs by the workforce going onto flexible working. People will be reasonable and help if you are communicative and sensible - and lead by example. Banks who fly executives to Spa resorts at the time of crisis don't win favours so think about your own largess in front of employees. They will respect your decisions if you also live by the same credo. Link any new payments to results - make sure all new costs are covered only by the profit created rather than paying in advance.
• Choose Your Customers Very Carefully - remember, it costs around 5 times as much to find new customers than keep existing ones. Throw a blanket of value around your existing customers and go that extra yard to make sure service never degrades. Pick new customer acquisition very carefully. Keep away from competition and price sensitivity - some business can really be bad business. Assess their worth, the cost it might take to acquire them and your capability given your existing resources in servicing the business.
• Keep Reviewing Your Pipeline - In a recession customer buying moods change like the wind. Make sure you constantly review the pipeline of deals to ensure they are realistic and reforecast and adjust accordingly.
• Conserve Cash - above all make sure you collect cash voraciously and hang onto it as long as possible. Remember nobody will lend you cash for Working Capital like salaries or possibly even to buy stock. Banks are more risk averse than ever and if there is one major consequence of all that avarice at the top end it is that the small customer and consumer pays the price, because we simply have no choice but to do so.
• Funding - getting new funding specifically from VCs in 2009 in particular is going to be tough as their own sources of funds are drying up but they will certainly be calling the shots on any deals. Don't put yourself in that situation if you can avoid it. If you are starting up, pick a market where your products and services will be bought no matter what the economy is doing, build a proof of concept in terms of getting early sales and then ask for money to grow rather than really start up.

All this may seem a little excessive before the real party begins. Well things can change very quickly. As mortgages dried up, Estate Agents saw their average house sales drop to 1 sale per week in no time, Savills reported an 80% drop in high house sales in a single quarter. The recession will cause a sharp and very hard fall in confidence and it will affect you. Plan now to avoid its consequences.

If you need further advice on any or all this, please call me on +44(2) 207 193 2356 or mail to info@calxeurope.com.