Wow, what a month... The US were down rated to AA+, the media continues to forecast economic doom and gloom, the bank of England pull back on their economy recovery forecast, and we hear of more local businesses closing, not to mention UK riots or western stock market unease... I would be surely crazy to suggest that business is thriving?

Let me share my definition of crazy in today's ever more dynamic economic climate - Doing the same things you have always done over and over again and expecting different results ... Yip sounds insane but the majority of businesses are doing just that right now. As for my definition of insanity - trying even harder to do the same things over and over again and expecting different results. The world has changed, our economy has changed, and as business owners we must lead change in our organisations... For those that are business is thriving!

Do we need to face up and review the very real and long term economic challenges we have? Absolutely, but let's also put that into some kind of perspective in terms of current business opportunities. What if instead of listening to the negativity swirled up by the media as business owners we lead the way in shifting our own paradigms?

The Prosperity Paradigm: Your prosperity is directly related to your philosophy and not to the economy. We need to stop focusing our thoughts on things we cannot affect and have no control over, then communally complaining to each other about them. Instead, focus our thoughts on those things we can affect within our business. When you understand the cyclical nature of recession we can begin to grasp that now is when we should be investing in our team, our marketing, our company and ourselves, why?... because all our competitors are doing the exact opposite; just trying to ride out the storm. Now is the time to negotiate with suppliers and landlords and to invest in capital purchases, why... because supply is out stripping demand therefore deals are there to be made. If you don't have the capital to do these things right now it is either because you spent or invested too much whilst the economy was in a boom cycle (at the wrong time) and did not keep reserves to take advantage of the bust cycle.... or your business was or is still not generating enough capital reserves in the first place. Either way businesses that are thriving now are using this economy as an opportunity to streak ahead of their competition. They don't need to slash overheads and expenditure as so many companies have been doing in order to save pennies, why? because they were always in control of these. This economy is the opportunity of our life times and for those companies that are investing in continual improvement and business development right now... Business Is Thriving!

 
 The Recession Paradigm:

So what is recession, and what was the catalyst for the latest one in the economic cycle we are just crawling out of? Most importantly how can we generate more growth as businesses and in our economy? Incidentally the frequency of the economic recessional cycle is historically every ~10years, (7-8 year boom 2-3 year bust).

The catalyst for the start of the 2008 recession, which we widely recognise as starting in the UK with Northern Rock crash in September 2007, was caused by the crash in US Subprime mortgage market; basically lending to people at higher interest rates because that had a poor payment history, and due to form ended up defaulting. The technical indicator of recession is two consecutive quarters of negative economic growth as measured in Gross Domestic Product (GDP).  GDP is the monetary value of all the goods and services produced within the UK borders in a specified time period. However, it includes all private and public consumption of amenities and other government outlays, investment and exports less imports, so many influences. Total UK GDP is currently 0.5% up on the previous quarter; unfortunately some sectors within that total did fall from last quarter.

So what does this mean and what's the paradigm? What it means in simple terms for business is that since 2008 supply has outweighed demand. We stopped buying as much, or spending as much, or exporting as much, or constructing as much but supply stayed at the same levels. And so the Paradigm; overall GDP has fallen by just over 5% since 2008, information which we can chose to hang ourselves with or we can choose to look at it in terms of massive opportunity... 95% of all the wealth in this country that was spent in 2007 is still being spent today and to get our share we must be better than our competition in all aspects of our business. If you want some of that wealth then you need to change your way of thinking and doing... NOW.  

For those that are business is thriving!  

The Banking Paradigm:

Banking is a passionate subject but let's put philosophical debates about banking corporate structures, historical lending or investment decisions or bonuses to one side, after all we cannot affect any of these things directly. What we can affect is bank lending... Yip I said we can affect it. The big popular question is are the Banks are willing to lend; and the popular answer is no. However the reality is that they are willing to lend but will no longer base risk weighted on opportunity, the risk assessments are currently based on stability. Think of the Bank's lending risk criteria as a swinging pendulum. In the Naughties (pardon the pun) the banks were lending based on some historical stability but weighted favourably on forward looking projections... The pendulum was at rest or perfectly vertical. Now those same criteria have swung way to the left, into the high risk zone. And the lending zone is now way to the right, the minimal risk zone or weighted more on historical stability. I can assure you based on economic investment necessity that pendulum will swing back to centre through the normal economic cycle, however it will be a new centre. In other words the risk criteria has changed forever, so again we must change our own paradigms about how we run our businesses in order to secure funding from future Bank's. Currently with the pendulum so far to the left, low risk zone a gaping hole does exist for rapid growth companies, those heavily invested in R&D, or risk averse enough to take on new and bigger projects, etc. The Banks and Government have a moral responsibility to correct this and adjust the pendulum swing accordingly. As that happens and for us on the ground who fit that the growth category we must seek collaborative funding elsewhere, via venture capital, hedge funds, and Government and EU schemes, such as the West of Scotland Loan Fund accessible by application through your local council. We must also assure progressive taxation management, such as the R&D taxation relief scheme, etc.

For the majority of businesses that are doing as they have always done or just riding out the storm, don't think I am defending the Bank's however, we cannot on the one hand blame the banks for historical slack lending policies that got us into recession and then expect them to lend like they once did. Yes, risk assessments need to normalise and will, however as business owners we can no longer rely on our accountants or bank managers to tell us, or access our historical numbers. It is our job to know them real time through KPI's / KRI's and forecast them in terms of sales targets and cash flow budgets... What this means is that not only do business owners need to educate themselves, and introduce good management account systems (looking at the bottom line of our P&L will not cut it, we need to know our balance sheet and have a great cash flow forecast) we need to learn about the Ratios that banks and investors like myself use to analyse investment risk as we discussed in my last newsletter: Healthy Ratios; Healthy Business  

As for those business owners who are today shifting these Paradigms - The future is theirs.

P.S. Just in case you have not had enough... read my Blog on

The Economic Paradigm and beging to understand the state of our nation and how we can change it.