Setting up in business: Le Christmas Crunch

Well, I just fancied having a break as we have been slogging away for almost six months – planning, starting, measuring and then employing. So, phew, it’s the Christmas break. Well haven’t we done well to get here? You certainly have. And now for a little topical help: the credit crunch that is currently the focus of so many media reports. What does it mean and what effect can it have on your small, fledging business – or even to larger, well-established enterprises?
What does it mean?
In layman’s terms, it means that the banks have effectively over-extended their lending to each other. Happy to take the easy buck (its effect is, predominantly, in the USA) they have lent extensively to each other and especially to lenders in the sub-prime market. As recession in the US has begun to bite, customers have started to default. Banks have become nervous and stopped lending to each other.
That should be fine but – and there always is a but – if you have agreed, say, £500 million worth of mortgages to your customers and then find you cannot pay them (because other banks are not lending to you) then … crunch. You cannot fulfill your commitments. What follows is a nasty spiral: as more banks become nervous, the more desperate you become and … the less banks will lend so, effectively, your business stops. It’s called doing a Northern Rock.
What does it mean to you?
Everyone talks about the cause but not many have mentioned the effect it has on the high street borrower because, ultimately, as I tuck into my roast turkey, do I really care if Northern Rock shareholders get a good or a bad deal? Surely, if you invest in a public company you must expect to take the associated risks that go with your investment? What really affects me, as I help myself to more roast potatoes, is the effect it could have on me.
And, unfortunately, it does have an effect on me – in the broadcast world.
In our world, Christmas is the time not of good will but of survival of the fittest. Our income is all based around Christmas TV and advertising. It’s as if everyone has the gas turned full on until December and then the pilot light goes out. People don’t pay their invoices. Nothing really happens from mid-November until probably mid-February. And no matter how well you have been trading, people just stop paying at this time of year.
Look at the failures around Christmas and New Year: Optex, VFG, Resolution. People pay out bonuses, throw parties, etc, etc but, with no income coming in, by the end of January there’s no money for salaries, rent, VAT, tax and, as you are at the top of your overdraft … crunch. You are in the same position as Northern Rock – except that the Chancellor of the Exchequer won’t answer your desperate phone calls.
So how can you avoid the crunch?
Plan for extreme circumstances: I hate to harp on about planning but crunch-avoidance is all about planning. First, make sure that all your current and future borrowing facilities are secure (I have just done this myself). If you are running a temporary overdraft ensure that the bank manager confirms it is authorised (some run out at the end of the year). If you have any other sources of finance: confirm they, too, are all current and valid. Then run a cash flow – it doesn’t matter how crudely you do it – adding up all the ins that you can guarantee and then deducting all the outs that you must pay. If the balance is ok then you will probably be all right. If it isn’t, think: “do I have to pay all the outs when they are due?”. I never advocate paying late but in a one-off crunch the relevant government offices are often sympathetic – so long as it doesn’t become a habit – so it is worth asking for a bit of leeway. Making these sorts of special arrangements, in extreme circumstances, could be enough to give you the headroom you need until your business income picks up in the spring.
Check what’s owed to you: If planning doesn’t work then think about what you have in the business, hidden from view. Many businesses are stuck for cash flow because they are sitting on either large debts or unencumbered assets – yet these can be used to negotiate borrowing. Work out what you have in theory, if not in practice, and use it as leverage. But – a word of caution: don’t leave it too late as lenders can’t always work miracles overnight (sorry, but I’m back to planning again).
Seek advice: Lastly, if this is all alien to you – or even if you know all about it but want an outside view – talk to someone, ask for impartial advice, throw a few ideas around. Most lenders – including us – give free, no-obligation advice to companies on how to manage their cash flow in times of crisis; it would be very shortsighted not to seek it.
If you plan now for the future of your business, in particular ensuring you can make it over this bleak income period, you’ll be able to enjoy the crunch … of crispy Christmas bacon with your succulent turkey, accompanied by a fine glass of wine. Have a happy New Year – and a prosperous one at that.
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Tags: iss016 | finance | business | credit crunch | northern rock | N/A
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