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November 07, 2008

Get Used to Living Smaller

Get Used to Living Smaller

Summary

Most small businesses have yet to see the many problems that will come as weakness in the broader economy starts to ripple through all secto

Most small businesses have yet to see the many problems that will come as weakness in the broader economy starts to ripple through all sectors, but barring an economic miracle we're in for a very rocky ride.

Businesses that depend heavily on credit lines should look for ways to reduce that dependence as much as possible.  For example, consider discounts for payment at time of service and consider relatives and business partners as sources for short term loans, etc.   The condition of the entire global banking system is not clear at this time, but it's very likely that credit will be tight for several months and perhaps longer.

In general, look for ways to run your business more efficiently.   With only a handful of exceptions your revenues are going to go down and profit is going to drop if you can't cut expenses significantly.   Use this time as an extra incentive to run very lean and efficient - always an advantage in good times and bad.    Put off purchases that are not necessary and consider downsizing office space.   Keep employees realistically informed of their prospects and make it clear that productivity is of the highest priority in the coming years.

Bank failure?  Just follow the Hitchhiker's Guide to the Galaxy.  (Don't panic!)

A tiny silver lining is that bank failures, though inevitable, will not pose extraordinary problems because it is very clear that the government plans to take on any risks associated with normal banking activities.  I think this stems from Bernanke's deep understanding of the forces that drove the great depression and the idea that government intervened too little and too late, allowing huge banking failures to deepen the problems.  The government will become involved in this economy to a greater extent than at any time in US history.    It's extremely hard to predict the effect this will have but generally it is likely to lead to stability and inflation as new money pours into the system to buy up toxic bank paper, insure depositors, and more.

Planning for the future:

I'm planning for at least several years of negative economic growth as the economy shrinks.   I think the economy has swelled to absorb the spending frenzy from trillions in paper wealth that has now evaporated, and it will take several years to scale back business to match reduced demand and reduced spending power.   I don't think this will be catastrophic, and if the government manages the bailout properly it may be relatively painless for many, though a lot of people are going to lose their jobs and I think most businesses should batten down the hatches for a long winters night of low revenues, smaller customer base, competitive pressures from more efficient players in their niches, and generally a very challenging business climate.   For the first time in many years I think risk and innovation is not likely to reap rewards with the probably exception of the real estate and financial sectors where many fortunes will be made by those who correctly anticipate the massive changes that will result from the global economic bailouts and interest rate manipulations.