The dreaded R word

I’ve never been more glad not to be an investment banker. The world stock markets are having a pretty torrid time at the moment. I feel stupid that I should have warned you all, as I took out an ISA recently and that always seems to cause the markets to crash shortly afterwards.

No-one can claim to be surprised. As Peter Drucker said, you should not try to make business sense of many dot com companies, they are just stock market gambles. I know a dot com business in Scotland that raised about £ ½ million from private investors for a business that had little more than a catchy name and no clear way of making money. And they still seem to be chasing further funds.

I’m afraid to mention the ‘r’ word. No business person wants to talk about a recession in the same way that the army never teaches you how to retreat. There is a lot of sense in the view that you can talk yourself into a recession. Business is more about psychology than economics and if we go around doomsaying one, we shouldn’t be too surprised when it comes true. However, as a small business we can’t stick our heads in the sand and hope it passes us by. I follow the philosophy of expect the best but prepare for the worst.

So what can a small business do to ensure it is storm proof? The first step has to be cash flow. If you give extensive credit to customers you are effectively acting as a bank to them. Think about lending money to many of your customers, and it will give you a different attitude to credit. Really screw down the credit terms you give to customers, especially new ones. Then get a dragon in to chase up these debts. The customers who nag most get paid first. Make sure that’s you.

Now would also be a good time to take your bank manager out for lunch. Show them the nice set of figures you have for the year so far, but be sanguine about your prospects. We have produced a second set of financial projections for the year with pessimistic assumptions. I would rather beat these comfortably than fall short of the others.

At the same time, don’t panic and follow the herd. Scotland wisely ignored the excesses of the dot economy, and so should avoid the worst of the dot bombs. For good soundly run companies, a recession is a good time to do business with many bargains around. Just as a bull market doesn’t mean bad businesses are good, a bear market doesn’t mean good ones are all bad.