The Global Recession, SMEs and Entrepreneurs

TopMBA.com looks at the impact of the global recession and credit crunch crisis on small and medium enterprises and what this means for entrepreneurs. 

It took until late into 2008 for the Governor of the Bank of England, Mervyn King, to say that Britain is in recession, meaning that the economy has shrunk for two consecutive quarters. The result - a huge fall in consumer confidence, a massive drop in the FTSE 100 shares index, the pound's worst fall against the dollar in several years and predicted doom and gloom for the business world for the foreseeable future.

"Nobody knows how long the economic downturn will last," says Paul Danos, Dean of Tuck School of Business at Dartmouth, USA. "But what we do know is that no recession lasts forever and that there will be an upswing. During this intervening time there will be a lot of consolidation in larger and smaller companies."

As this article goes to print, loans for small to medium enterprises (SMEs) are not only harder to find from overly cautious banks but considerably more expensive than they have been for decades. Consumers are tightening their belts and starting to spend only on necessities, which has a major impact on SMEs. Likewise these companies are starting to look carefully at whom they have as suppliers and customers. Is their next major contract going to be able to pay their bills and on time? Surviving hard economic times is particularly tricky for SMEs and entrepreneurs, and small business owners are looking around for advice from almost any quarter.

Dan Steppe, director of the entrepreneur program at the University of Houston's C. T. Bauer College of Business, says that there is a way to remain resilient in the midst of so much uncertainty. "It's important to face facts but avoid being drawn into the media melodrama," he says. “We got into this problem because we have too much debt and not enough collateral. These problems have not been solved. We are going to be or are already in a recession."The bottom of the cycle is a really good place to start a business," says Ron Wuensch, a colleague of Steppe at UH Bauer, "because when you start off on an up cycle, your assumption is that this level of profitability is going to go on forever."

During economic downturns, competitors' failures present an opportunity, and good business people can exploit this, often by buying the failed company or hiring top employees left without a job. Smaller businesses can fall back on ruthless business practises. It may be the best way to see it through. Dean Danos says, "There will be a lot of consolidation going on over the next time period. I think small businesses should try and stick it out, but some amount of consolidation is inevitable." Weunsch advocates a serious tightening of the belt. "Cut back on everything. Be cruel and heartless about what you need to be in business. Get rid of everything you don't need. Know exactly why you borrow what you do. With a change in economics you have an opportunity to really look at your business, and adjust it to the next economic reality."

Core to this principle is remembering the basics of sound business, such as never borrowing money on a short-term loan if you aren't really able to repay it until the long-term. "Forget that you're a financial genius,- Steppe says. "If you're borrowing money, it needs to be paid back over the life of the asset you're buying. Don't take out a 12-month loan assuming you'll be able to borrow at 5 percent or borrow at all when it comes due." Wuensch adds: "Really get to know your customer. Rip out your answering machine, step up your service and ask what they need. Understand how your target customer has evolved." In general, Steppe adds, it's best to target high-end or budget buyers, "the middle is gone."

Risk taking

Entrepreneurs are risk takers, by definition, but now is not the time to be launching new businesses without the deepest conviction and most thoroughly researched business plan. With finance hard to find and higher than the average 90% of new businesses likely to go under within the first three years of trading - and remember that most of these will go under due to cashflow problems - you'll need a watertight plan to convince financiers to give you money, get your business started and to think about turning a profit.

So what's the alternative? "Consider the intervening months or years a gift. Those who have experience are better off. Go work for someone else for a few years, fill in the holes of your education and keep working on your business plan,- Steppe says. "And narrow your focus. Energy and technology-based businesses, for instance, are two fields that will continue to have needs even as the economy falters." Remember that the most successful business people are highly adaptable. "That's the heart and soul of being an entrepreneur," Wuensch says. "Reading the environment and reacting to it is what an entrepreneur does. Figure out your position of strength, make good solid decisions based on your position of strength and the odds really are in your favour."

As an old adage goes, the bottom line is the bottom line and looking after that will occupy the next year or two for many small businesses. Dean Paul Danos says, "Nobody knows how long it is going to last"‚ maybe a year, eighteen months - but what we do know is that after this cycle is over, things are going to be different. It will be more regulated and banks are going to be looked at a lot more closely so that they aren't investing so heavily in such risky areas." For SMEs, the near to middle future may be the riskiest time of all. It will take brave owners and entrepreneurs to stick out the storm, yet for those who do so successfully, it could be the most profitable of all.