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Monday, 8 December 2008

The "L" Shaped Recession and the New Normality

During the last recession in the 1990s, I coined the phrase - the "L" shaped recession - simply because the economy seemed to fall vertically off a cliff and then go bumping along in an "L" shape.

What has happened now is exactly the same although possibly more severe. However, the next and possibly the more important point is - what do we do about it? There is no doubt that there are opportunities out there for the brave and perhaps for the risk takers. Acquisition possibilities are numerous, there are some very good people now available through redundancies or companies closing, and here and there there is some money available for interesting opportunities.

However, if what is required is to hunker down, batten down the hatches (or any other cliche you can think of) and wait for things to improve, you may be waiting for a long time and, worse, it may be too late to do anything.

The "L" shaped recession says that the economy has fallen off the cliff over a very short space of time and is now bumbling along in the New Normality! What is really needed now is to accept that what we are experiencing will be normal for the foreseeable future so we now need to reconstruct the business to suit.

Try the five line P&L - sales minus cost of sales equals gross profit less fixed costs equals net profit. Sales is comprised of price and volume, cost of sales is (generally) labour and materials so it is a matter of adjusting all these components until you are either break even or better still, in profit. It will take a lot of courage to reconstruct your business but unless you do, there may be little opportunity to do so in the future.

Try also the five point recession action plan:
  • Know your numbers
  • Cut or defer expenses
  • Accumulate cash
  • Go for opportunities
  • JFDI (Just do it!)
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