The New Norm is Becoming the Norm

How long is something new before it just starts being the status quo?

It’s been three years that our economy has been like this. I predict another 5-7, which could get stretched out to 10 years before we get back to a pre-2007 economic climate.

I’ve been saying for a while that we’re headed for another recession and that the economy is going to be flat for the next 5-7 years. By definition we can’t have a double-dip because we’ve had two quarters of growth.

But we keep getting held back from further recovery due to our own folly and the interconnectedness of the world economies.

The stock market has dropped 3.5%, giving up all of its upside for 2011, and no one could predict the tsunamis or the nuclear fallout in Japan. Another episode in Europe or elsewhere could put the U.S. right back on its butt (if we haven’t already tripped and we’re just in that pre-getting it state before we wind up on our butts).

If you read the papers in the last couple of days, you heard that the knocked-out power-plants that were supposedly controlling only 5% of of Tokyo were actually controlling as much as 25% of the electricity in Tokyo. This has slowed and will continue to slow Japanese manufacturing and business dramatically. Due to the Japanese “just in time” inventory method that most modern businesses have gone to in the last 15-20 years, Japanese auto makers in the US and others in the manufacturing sector are going to be slowed down. This will only further exacerbate our own recovery.

Who knows how far the Japanese market will go down at this point, and the more problems that arise the more this market will spiral. This will affect us.

Why am I throwing all of this out? No, I don’t like dread and doom. I like facing reality, and I’m sharing this because the recovery is going to get stretched out more and more and problems compound problems.

So what do you need to do? You need to prepare yourself and your business for this situation.

It can be hard to change because change is hard. But you need to look at what you can change to be proactive, even if something’s been working for 20 years. It may not need to be the product itself, but it may need to be your manufacturing processes or something else that let’s you stay ahead of this curve.

Separate the emotions, and look for practical solutions.

And beware the alligators. They may already be chomping.

What do you predict for the economy in years to come? How soon will a full recovery be in effect?

“If the Alligators are Biting, It’s Too Late to Drain the Swamp”

You may have heard this saying before:

“If the alligators are biting it’s too late to drain the swamp.”

Keep this in mind while running your business. Doing so can affect not only profitability but also your very survival.

Here are a few examples of when the alligators start biting:

1. Consider the sales manager who is not producing what you’ve come to expect from him; you notice a decline in sales and even a disruption to the team. He should either be refocused or fired. Now your revenue and profits are down. If he handled your largest accounts and the competition has now stolen them from your company, you’ve been bit by alligators.

2. Your CFO is constantly late with financial statements, and the bank is growing concerned. You then discover after months of frustration that he has personal problems that have affected his performance.  Now the bank is concerned about your ability to run your business. You’ve been bit by alligators.

3. The classic survival story involves fraud. Almost half – thats 50% – of our clients have encountered some kind of fraudulent situation. When the CFO/controller has been systematically stealing, the bank’s knee-jerk reaction can leave you scrambling to find another bank. That’s not so easy in this economic climate. You’ve been bit by alligators, and your company may be devoured.

The key here is to put safe guards in place with the assistance of your auditors. Don’t let the CFO set the testing limits above the limit he’s stealing. Let your auditors run the process. Also, as the CEO or key manager, you should periodically sign every check for a month that would normally be a “one signature” check handled by the CFO/Controller. This control is one great way to start draining the swamp.

How to Avoid Being Bitten by Alligators?

Be proactive instead of reactive. Drain the swamp before the alligators take up residence and start chomping.

As your company grows and you start delegating work, make sure that you keep yourself embedded in enough of the processes to have proper control. Don’t delegate and forget.

If you have auditing processes, don’t stick to limitations (e.g. we’ll look at all transactions over $5000). Mix things up and be unpredictable, so that no one can take advantage of your complacency or your routines.

Ask a lot of questions of your key people. Learn about your cash flow, your payables, and your company’s projections. Don’t believe what you’re told. Follow up on the details and have an auditor check out those projections. That’s prudent business practice.

I’m not suggesting that you don’t trust your CFO or that you don’t believe anyone. I’m just saying you need to question what’s happening and check up on things for yourself.

This may not be draining the swamp, but it is keeping the water level down. This is being proactive – not reactive – and it will always cost you less time and money.

Until next time, don’t get bit by the alligators.

Corporate Liquidations Suggest a Double-Dip Recession Might Still Hit

Every pundit and his brother has a prediction about whether or not we’re in for a double-dip recession.

If we’re to believe the government’s indicators and message, our economy is improving. But it’s not hard to manipulate statistics and present them in the best light. After all, part of a recovering economy is consumer confidence and a return to lending and spending.

Companies Keep Going Out of Business

However, based on GGG’s last three years’ client base the economy isn’t looking so up. That is, more of our clients than ever before required asset recovery, surrendered to bank demands, and have operating losses. Even those that turn around are taking longer than our standard experience.

Now, before you go questioning the quality of our turnaround abilities, it’s worth mentioning that for the majority of our history, workouts were 95% of our business model, with a fantastic 90% success rate based on our client’s – not our – goals.

In 2008 and 2009, however, various forms of asset recovery were 50% of our business. More companies out there are failing or have failed and that makes more business for which we just go in to clean up the mess and recover as much value as possible for whoever is getting paid out.

In my opinion, that just sucks. I love turnaround. I love creating value. I love saving jobs. Shooting the company and burying it -though we do that and do it well – are not the sign of a fun time or a healthy economy.

Will We Double-Dip the Chip?

At the end of 2010, we’re still seeing significant asset recovery situations – around 25%.

Sure, that’s better than the 50% of the two previous years, but it’s still high, and as far as I’m concerned, the number of failing businesses that are past the point of turnaround is a sign that we may not be able to avoid a double-dip recession.

Another indicator of this problem – and one with which I work intimately – is the number of companies failing because they can’t find refinancing after the FDIC takes over their failing bank.

The dip might not be deep or as jarring as the first, but history tells us that it will still postpone a decrease in unemployment and a return to a normalcy in lending.

What To Do

So my advice, both personally and corporately: stay liquid.

That’s how our successful clients stay successful and defy market trends at times like these.

Use that liquidity in an emergency, to wait for wonderful investment opportunities or to buy out competitors when they falter – you could get great deals at low multiples or for deeply discounted asset values.

Consider Fortune 100 companies. They’re keeping more cash on their balance sheets than ever before and buying businesses or repurchasing their own stock at traditionally lower prices.

Everyone else may be dipping but staying liquid could keep you floating.

Until next week, watch out for the alligators.*

*I’ll explain the alligators in an upcoming post so stay tuned . . .