by Will Hawkins
Small Business Realities & the Credit Crunch
4:03 pm in business by Will Hawkins
Running your own business is a tough thing to do. Nevertheless, you can control most aspects of the business, although you may never seem to have enough time to do them thoroughly. You can control how much your product service or costs to make and market. You can control your cash-flow. You can control how much you pay yourself. But the credit crunch has highlighted aspects of a business which cannot be controlled.
Someone I know well runs a retail lighting business in London and has done so successfully for many years. His family business has a warehouse in the midlands of the UK from where they run their international and mail order business. They have franchises in some stores in the USA too. Business is going well.
He had been considering investing in more property in London for some months before the credit crunch but he could not find anything suitable so he put off the purchase and kept the cash liquid until he found something suitable. However, this January the business had a disastrous run of sales and he had to dip into the cash he would have used to buy the property to maintain their cash-flow. The business also had to let some staff go to make efficiencies.
Had the business not had this cash, he would have had to go to the bank to borrow the money in the form of an extended overdraft perhaps. Things as they are now mean that, in fact, the bank would not have lent them the money despite the fact that the business has a healthy track record and that the business has good order books into the future.
Therefore, the business could have folded within a month had he not had the cash reserves to carry them over into a healthy month of sales in February. That is how the credit crunch is affecting small businesses up and down the country and across much of the world.
No wonder the Government is trying everything it can to encourage the banks to lend money including plans such as owning them, providing guarantee schemes and using “quantitative easing” to get cash where it is needed. No wonder too that there is such a backlash against the rewards for failure which many bankers are receiving.
Good businesses are folding due to circumstances experienced by my friend and his business because they have one bad month. There are no bale-outs for them.
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Great post. It highlights the plight of many small business owners well. I’m concerned – however – about the (macro-economic) solutions being currently applied to address the problem. Inflation and Interest rates are going down which gives many governments the incentive to print more money and run huge deficits. This in itself is a form of creating more debt – debt that someone will eventually have to pay for.
Yup, that someone is the taxpayer. It’s like borrowing from Peter to pay Paul. I wish I had a better solution but frankly I don’t.
Here’s the question of the decade: What if the current interventions are not enough to stem the bloodletting? Can you imagine what would happen then?
Hi Figo,
Thanks for your comments.
You make a good point and ask a good question.
Sometime, the government should let one of these institutions fail. The fact that some of the financial institutions are deemed too big to fail is the worrying factor. We became heavily reliant on certain institutions propping up the rest of the system and now the government continues to prop up failed institutions which, as you say, feels as though we are just storing up trouble for the future rather than dealing with it now.
I am no economist, but, as a businessman, I find it hard to take when ‘natural selection’ in business is not allowed to take its course. As a taxpayer, I am responsible for being successful in my business and if I fail there is nobody to save me or the business. But failure will allow me to learn how to avoid the reasons for the failure in the future.
These financial institutions, and the people within them, will not learn from their failures because they will have just learned that the government will bail them out if they are incompetent.
Another good post will,
I have to say that i doubt there would be a safety balnket available to me if my business was struggling. Equally, the banking industry are not halping the genuine businesses which would survive if their cash-flow issues were alleviated by extended borrowing.
However, i fear that the banks are wary as they have just been stubng by the uncontrolled risks that were prevalent on the boom, and are knee-jerking in the bust.
The bottom line is that the banks lent to individuals and businesses which were risky, in the name of profit without sufficient regulation or control.
As we are now in unknown territory, how can you tell which businesses are worth the risk of extending lending to? I dont think you can, and this is the dilemma that we find ourselves in. Its at times like these that having a cash contingency is of use, but how many businesses thought ahead?
Pete
Completely agree with how many businesses thought ahead and kept cash back for a ‘rainy day’. and you are right that some good businesses who have one bad month can suddenly find themselves in a very difficult position with the potential for the business to close despite a good order book.
But the fundamental question that banks forgot to ask themselves is ‘Do I understand what I am investing in?’ If they had done their due diligence correctly to understand the business they were ploughing money into then I expect they would not have done it. But greed is a very powerful urge!