Activity levels will return over the next 2 to 3 years (depending on your perspective, yes, it will take that long, or yes, it will happen that quickly), and many businesses will die as a result.Having worked through 7 economic recoveries in the US and the UK – none of them from a drop as precipitous as this one – I am by now all too depressingly familiar with the negative impact a recovery can have un an unprepared business.
Here’s how it works – see if you can spot the really tricky part:
1. Activity levels start to rise.
2. The business gets more new customers / clients.
3. If required, the business buys inventory to meet the new customer / client needs.
4. The business takes on new staff and resources to service the customers / clients.
5. The profit on the new customer / client business is not sufficient to fund steps 3 and 4.
Did you see the really tricky part? If you look hard, it’s deeply hidden away in step 5 – the ‘not enough profit’ thing. That’ll kill ya pretty quickly, no?
Or at least you’d think it was hidden away, even invisible, if you’d seen as many businesses as I have plow heedlessly right into an eight-foot snowdrift of loss-making new business when coming out of a recession.
Why do seemingly right-minded, intelligent CEO’s and SVP’s let such a thing happen? Well, it’s a consequence of many things – hope, unleashed frustration and lack of good data for a few, but mostly it’s caused by kinda knowing that yes, this job we’re taking on at a loss, but hey baby, we’re now riding the growth wave and all those good-profit jobs in the very near future will make up for the loss on this one.
Except that every job is this job, until the business has hemorrhaged so much riding the recovery that it finally slides under for the third and last time.
Of course, you won’t let that happen to you, because you’ll invoke the 2 most stirring words you’ll have read this week (and the sexiest phrase in managing an economic recovery): cost accounting.