"My Business is Recession-proof"

I just happened to be sitting in a mid-market restaurant in the West End last week interviewing someone who had to abandon his business, when a pompous fellow at the next table bellowed to his table-mate that his business was recession-proof.

I could not help but overhear as half the other customers did. He continued to assert that 'everyone wants web design'. It was cold comfort for my co-diner as his business had been precisely that.

How Does a Recession Work?

Well that's the thing. They mercifully don't happen that often in a technical sense, i.e. two successive quarters of negative growth, although most businesses may suffer such similar blips in their time. The fact is, when an entire economy fails and the global one at that, just about everyone is exposed in some way. If you are an Insolvency Practitioner, you may well wring your hands with delight and take on extra staff, as one sure outcome is that the rate at which businesses fail will increase - and very sharply at that.

If you are an Outplacement Consultant, you may will afford a wry smile as your services suddenly are in high demand. If you are a Recruiter, times will certainly be glum.

In general, the amount of Companies which will feel downward pressure or no growth in a Recession will far exceed those who experience growth.

I am talking the obvious - everyone knows this? Not the larger-than-life chap at the next door table. For him, the world continues as if nothing has happened. I just hope he did not have contracts with Lehman Bros, MFI, Woolworths, Citigroup, BT, RBS, HBOS, Northern Rock, Bradford & Bingley, AIG, Bear Stearns...... you get my drift.

The Ripple Effect

The problem with Recession is that most people have not experienced either managing a business or running teams during one. Some of us are old enough to bear the scars. What happens can be dramatic and incredibly swift. And in this current one we have a very important factor to add to the mix - a potential Perfect Storm - as we have the Credit Crunch to face as well. While Politicians will desperately tell you that the current financial crisis started in the US, it most definitely did not. Sub-prime mortgages sold in the Southern States of the US by Local Mutuals was not the cause of the Credit Crunch - that problem merely exposed a very flawed model for capital raising which flowed right the way to the top. At its peak, the UK housing market showed 160% growth over 10 years while the average family was in fact worse off in terms of real income and savings.

Britain was living off the increased value of its homes, as indeed the US were.

It could not be sustained and the consequence of that is that lending is severely constrained. That hits businesses hard. No matter what the Government will say about supporting Entrepreneurs, the fact of the matter is no Bank will lend to pay wages for survival. They lend against collateral like machines, plant or buildings - assets which can be turned into money if need be. Working Capital for wages goes straight into pockets and tax. At a push they will lend against future orders but that will not be at pleasant rates.

Quick as a flash, and wiping the smiles off our faces, things start to fail. I read a column in the Telegraph by an eminent Banker who said that the Financial Crisis was contained within that sector and the wider economy would not be affected. The problem with Bankers is that they have become so self-absorbed in their own 'game' that they have lost touch with what capital is for. Every business and consumer needs money to survive and grow and if it isn't there, it can't be used and spent.

As Banks collapsed, panicked Politicians and Bankers got together to bail out the Financial Sector, to the tune so far of £4.5 trillion globally, although the US has pumped another $800 bn into the markets just this week. Ominously, even the Governor of The Bank of England hinted this week to expect more banks to fail. The fact is no one knows how bad this problem is. But to put some perspective on it, world output in 2006 was estimated at $47 trillion and at that time the outstanding positions on derivatives was $473 trillion - this has risen to $535 trillion and it rises daily. The bubble is fit to burst and in some ways we have yet to see the full effects.

Meanwhile, as credit and recession collide, within single reporting cycles, mega-companies like BT lay off 6% of its workforce in an industry that everyone would tell you is growing. The roll call of job losses is daily as Companies Hit The Wall and have no room to move.

Like my man at the next door table, they never saw it coming. Why? Because last year the likes of BT did not sit down and look at its business customer profile and think about who its major customers were. A huge proportion of their business supports the Finance Sector and so they were horribly exposed to the effects of Banking crashes and lack of growth. And what about supporting businesses who depend upon BT?

Look At Your Own Business

What the man at the next door table had done was look at his product and determined everyone needs a website. What he had not done was look at where his customers lay. In the heart of the West End, he may well find many of his customers are media types and many of those will be directly exposed to the brunt of the recession which will be felt at the retail end. As household names like Woolworth and MFI fail, advertising and marketing spend by retailers will drop and sure enough websites will be left static or less maintained as money is channelled into survival rather than growth.

It will be a dramatic and speedy ripple effect.

So while you may believe your business is recession proof the problem is that businesses of your customers may not be. As the likes of BT hack 6% of its workforce in a knee jerk reaction, they will start cutting costs and spend with no real logic and what you may believe is an essential item will not be bought because the bulk of executives and managers do not work with that in mind, simply as they have never experienced a recession before and so paralysis and lack of decision-making kick in.

Worse still, most 'dynamic managers' shrink into their shell in the face of a recession and gladly hand the reins of the business to accountants and consultants who simply look at numbers. They care not a jot about what is essential for the future - it's all about survival and the now.

Think Before It's Too Late

I did not pass on any words of wisdom to the fellow at the next table. But if I did and he had listened I would have told him to go back to the office, take a long hard look at his existing customer base and his future pipeline and review it all line by line. Look very hard at those customers, deal values and sales cycles and think how could these deals be affected by the recession because the customer is dependent on others in the market, are not well funded, are laying off staff or cutting costs - whatever, just go take a look. Then get realistic.

For me - I help companies grow and VCs are very reticent to help their emerging proteges to do so right now. They know now is not the time to be spending their cash but to conserve it and keep their powder dry for the upturn. So my traditional customer base is stagnant - it happened in a short space of time in less than a week after Sequoia held its famous All Hands CEO meeting and the effect rippled quickly.

In a week 50% of my traditional business was at risk. But I had been anticipating this since August last year thanks to a local VC who thought this would be a consequence. Now my clients are based in 3 continents and two are dependent on Government spend which is more secure in the short term. Had I not planned for this, I would have slipped under without anyone noticing in a single quarter.

I cannot emphasise this enough - Recessions can be survived but it will mean changing in the short term and being realistic.

Ignore it at your peril.