Are YOU Prepared... for a Much Deeper Recession?

If things have seemed quiet in San Francisco over the last week it was probably because the American Economic Association was having its annual meeting there. The thought of thousands of economists descending on your city is enugh to dampen anyone's enthusiasm. Economists don't exactly conjure up images of wild parties, loud music and drunken revellry. Economists are serious, thoughtful people and to be honest, that is probably what we need at this stage of the recession.

If the paper presented by Rogoff & Reinhart is anything to go by, the annual meeting must have been a sombre affair. Their paper on 'The Aftermath of Financial Crises' looked at how both developed and developing economies fared after 14 different financial crises, including the Great Depression of the 30s. They found that recessions that followed financial crises were long and deep, with GDP per person taking on average two years to reach bottom, and unemployement, house prices and equity prices taking on average five years. Most of the other economist who presented papers were similarly downbeat. Even the most upbeat economist, Olivier Blanchard from the IMF, thought that the recession will take at least a year to reach bottom and only then with the right policies in place.

In business language, that probably means that times are going to be difficult, very dfficult for at least the next two to three years: Customers won't be buying, cashflow will be reduced, money will be difficult and expensive to borrow, and further cutbacks will inevitably have to be made. Many companies have already made cutbacks: They have closed factories and offices, reduced investments and laid-off 10,000s of staff. Unfortunately, many of these cutbacks were knee-jerk responses to the start of the recession and whilst they have cut costs, they have also destroyed the companies' value-creating abilities as well.

The $64,000 question is what are YOU going to do if things go from bad, to worse, to much worse in 2009. And continue in a downward spiral in 2010? In particular:

• What are you going to do if revenues fall by 50%? - Are you going to close half of your factories and offices? What will that mean for the morale of remaining staff?
• What are you going to do if costs rise by 50%? - Can you inrease prices and still expect customers to buy from you? Or are you going to have to eat the increase yourself?
• What are you going to do if cashflow falls by 50% and your profits are completely wiped out? - Do you have sufficient financial resources you can fall back on? Or are you going to have to seek capital from elsewhere?
• What are you going to do if you run short of operating capital? - Will your bank still lend you money at an affordable rate? Or do you have alternative sources if they won't?
• What are you going to do if your biggest distribution partner suddenly goes bankrupt? - Can you take over their distribution network at short notice? Or will you have to inform customers to use other channels?
• What are you going to do if your biggest debtor goes bankrupt? - Are you going to have to go into administration to seek protection from your own creditors? Is this curtains for your company?

These are all the types of questions you need to be asking yourself today. They are questions about business survival, not trivia like whether you should maintain spending on the customer experience or whether you should make cutbacks in TV & Radio marketing. The recession will get worse, probably much worse, before it gets any better. As some have suggested, your worst case scenarios today may well become your basic operating assumptions tomorrow.

Wat do you think? Are you already planning for the unthinkable? Or are you rather hoping that the whole recession will blow over by the summer?

Post a comment or email me at graham(dot)hil(at)web(dot)de to get the conversation going.

Tip of the Hat to Drastic Times at The Economist

Graham Hill
Customer-driven Innovator
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