Monday, 15 June 2009

Is The Recession Over?

They say a week is a long time in politics - well I have had a week or so off and in that time Gordon Brown has endured the filthest time of his life and survived.

The price, though, is that he confirmed that Peter Mandelson is the most powerful man in Britain who organised the necessary Parliamentary support for Brown after the disastrous MEP and Local Government Elections. If we needed any evidence of how powerful Mandelson has become just think on the incredible decision to leave Darling as Chancellor instead of Brown's personal choice in Balls - Ed, I mean.

Brown endured further humiliation as a procession of Cabinet Ministers resigned with careful timing and wounding parting shots from Purnell, to the 'snake in the grass' Blears to Flint, who left with a withering blast on New Labour's record on women in the Cabinet. As Britain voted emphatically against New Labour, even allowing a BNP Councillor to be elected in leafy Hertfordshire and two of them as BNPs, Mandelson rallied the troops enough to make sure Brown clung to power within his own party. There is always a price to pay with Mandelson - and it must gag in Brown's throat to have to answer to him for the rest of his tenure.

But when you sleep with the devil......

Recession? What Recession?

As we begin a new week it seems all talk of a recession is moving into the past tense. Green shoots of revival and talk of the worst being over now seem to dominate as the spin engine gets back into flow with Mandelson at the helm again. A couple of Think Tanks have indicated that Britain's economy actually grew in the last two months, there is some hope that the car industry is saved after Mandelson's £2.3bn promised bail out in February finally got somewhere and scrappage seems to be having some effect.

The NIESR, a Think Tank, has growth for the last 2 months at 0.2% in April and 0.1% in May but some say this is actually just a short period of growth within a wider recession, arguing there is always growth at the end of a tax year. The NIESR themselves are little baffled but believe this could be the start of a recovery. Indeed, house prices are beginning to show signs of a sort of recovery while mortgages are on the increase. However, the growth figures will merely show over the quarter that the decline has slowed in reality rather than real economic growth, so technically we are still in a recession.

At the business level, things are still very unclear. The situation on open headcounts and redundancies still points to the fact we have yet to feel the full force of the recession and there are no signs of a recovery on that front. Signs in the retail world are very mixed with giants like Tesco faltering for the first time in ages; the travel business is still dire with Easyjet and BA suffering badly while even Ryan Air is squealing - and still we see firms going out of business in this sector with the mighty Arcandor in Germany causing a heart flutter at Thomas Cook.

In the small business sector, there is still a mass of uncertainty. For my business, I have managed to switch interests to firms who are benefitting from Fiscal Stimulus and their businesses are flourishing. In one case, their market expectations in Italy, Spain, France and Germany are enjoying a rise in multiples of annual sales rather than just double digit growth and the emphasis on my work is how to gear the supply chain to cope with massive growth rather than survive a recession.

And here's the rub. The client is a UK company and as it eyes it's fair share of € multi million educational contracts in several countries, it has found its bottleneck as credit. Even by appointing large scale, financially sound Channel partners, we have found that, even when their Dun & Bradstreet ratings are high and their accounts good, that their credit insurance cover is pitiful.

If anything, credit insurance is stifling growth.

Would You Credit It?

As we neared the recession's event horizon, you could have got credit for just about anything - there was more money around than you could shake a stick at. There was a good reason for this - City whizz kids had found a way of making money just by issuing a debt and it had nothing to do with interest payments or the worth of the asset. The debt itself had become the lucrative 'asset' and trading it time and again had brought about wealth many times that asset's worth in short order.

The rest was history, and the consequence is that we have now retrenched beyond the point of common sense. Give a bank or credit insurer a D&B £1.5m credit rating for a company with a superb capitalisation and good accounts and you get ZERO insurance cover. No - not a penny.

How do you combat such a situation?

Here was my plan when the news came back. The consequence of the news was that my client would miss out on it's fair share of around 33% of a €50m government contract to be spent by the end of this year on interactive learning. The distributor we had appointed meant we could supply ex-stock all orders, make total solutions for the schools involved, ship the items anywhere in France and have them installed by the time the money needed to be spent - all small dealers would get credit and access to the products needed while my client's logistical costs would fall dramtically while doubling its revenue. Euphoria turned to dismay as the €1.4bn turnover distributor got a zero credit insurance rating.

So my solution was that my client should approach senior executives at the credit insurer and tell them that the tender in question was rock solid money proposed by Sarki himself to equip 5,000 classrooms across France by the end of the year. If, by the inaction of the credit insurer, our main competitor got more than their fair share of that money while we lost out because of zero credit insurance and, by chance, they use the same distributor or similar but had no problem getting credit for them, then we would duly sue them for compensation for losing out due to their prejudicial assessment.

I had suggested this course of action to the legal and finance department of my client and I had been told I was being silly - the world does not work like that. However, the CFO did outline the case to the credit insurer's senior people and within 24 hours a £500k credit insurance had been agreed - spookily, the exact amount applied for.

My simple philosophy here is that business is still business. A well argued, sensible approach showing the worth and the risk actually won the day - but it does mean that business has to think hard about the risks involved and be prepared to negotiate at the higheest level. Credit insurers, like most companies, employ mostly 'yes men' at the client level and so they will just read from a sheet and become intransigent when challenged. Their bosses are different.

Breaking Out After a Recession

I have argued a lot about planning for a recession and how this could avoid some of the disastrous consequences we have seen at some great companies. But I argue it not just to avoid the consequences of the recession but to set you fair in order to take advantage of the upswing. Taking opportunities as they arise when the green shoots appear is vital and if you are still looking at who should be made redundant and cost savings when the uptick comes, you will miss out.

When the upswing occurs, you have to have all the business elements aligned and credit will be one of the hardest issues to face. Risk is a bad word in small business as it is hard for banks and insurers to get granular - they think more about the macro issues. But that does not mean they cannot get granular and see opportunities.

For you as business executives, it is still very important to work out what business is good business and whether you are well placed to take advantage - this requires planning and being honest with yourself. The reason for this is that if you are going to ask the bank or credit insurer to support you, then you will get but one shot to get it right. If you go in arguing you need support based on a flimsy business model, low margin opportunities and requiring a lot of risk from them, then not only will they give you short shrift but they will be less inclined to listen to you next time.

I am not sure if the recession is over. I have a potential client who believes they can quadruple their business over the next two years - this week I hope to understand if they have the business plan to do this but it is exciting companies are thinking this way once again and looking at opportunities. What I do know is this:

If you do not have a plan to take the opportunities, you will miss them. And the plan needs to be properly thought through, detailed and stand up to the test. Then you will find, that money is once again very available. Many companies will win in the upswing but there will be many who ignore this advice and fail. The recession has yet to have its last laugh as its long tail will ensure businesses can still fail when the worst is long past.

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