The National Bureau of Economic Research (www.nber.org) is the arbiter of U.S. business
cycles: when they begin and when they end.
The recent volatility in global markets has led many, including this
economist, to think about where we are in the current business cycle. Because there is a lag in collecting and
analyzing macroeconomic data on economic performance, the reality is, we do not
know where we are right now, and we won’t know officially where we are now
until about 3 months from now. But right
now, without question, investors and businesses of all sizes are beginning to
wonder is the party over. Although some
might argue it was not much of a party to begin with, particularly if you are a
minority business owner who even after six years of NBER official growth since
the bottom of the last recession (June 2009), has only recently begun to fill
the warm glow of increased customer orders.
The thing about economic recessions, is they always come at
the wrong time. But they do come.
Since 1969, there have been 7 economic business cycles. The recessions associated with these seven
cycles were:
- December 1969- November 1970
- November 1973- March 1975
- January 1980 – July 1980
- July 1981- November 1982
- July 1990 – March 1991
- March 2000 – November 2001
- December 2007 – June 2009.
The most recent recession, AKA “The Great Recession” was the
longest of these seven. It is important
to note that each of these recessions was different in length, and cause and
effect. But there were similarities and
lessons from each of these experiences that minority entrepreneurs should learn
from.
One of the consequences of the last recession that we see
today is the lengthening of payment terms.
Prior to the 2007-2009 recession, companies typically paid invoices in
30 days. Now suppliers are reporting
payment terms of 90 to 120 days. What
happened? The Great Recession wrecked
havoc in credit markets. With major
financial institutions like Bears Stern, Lehman Brothers, Washington Mutual,
Wachovia, Fannie Mae and Freddie Mac and a total of 465 other banks and savings
and loan institutions failing, credit markets seized up, making it all but
impossible for many firms to borrow as they had prior to the Great
Recession. So as a result, corporations
“borrowed” from their suppliers, including their minority suppliers by
extending payment terms. Unfortunately
for suppliers, despite the return to more “normal” times, payment terms have
not declined. This is an example of the
lasting effects of recessions.
MBEs need to also be aware that economic recessions do not
have a proportionate impact on all suppliers.
In both absolute and relative terms, MBEs are likely to experience more
damage than non-diverse suppliers for two reasons. The first is that MBEs tend to be
concentrated in non-core commodities and services. During recessions, companies tend to
circle-the-wagons and focus on what is core to their own survival. This translates into non-core suppliers being
the early victims of an economic downturn.
Secondly, MBE suppliers are hurt more during recessions because, hard
times lead to increased competition. MBEs during downturns find themselves
competing not only with other MBEs, but with other sometimes very large
companies that do not want to experience reduced capacity utilization, and are
willing to sacrifice profits for capacity utilization. The increased competition from non-diverse
suppliers results in lost business and reduced profits.
I am not one to cry the “sky is falling” or about to fall,
but MBEs need to get ready for the next recession today. The current expansion is 73 months old. The average post-World War 2 expansion is 58
months. That means by historical
standards, this expansion is longer than most.
The chances are that the U.S. economy will be in recession within the
next two to three years if not sooner.
So what should MBEs be doing today?
There are four things MBEs should start doing today:
- Secure a Line of Credit Now;
- Clean up your Receivables;
- Start identifying your competitors that might go out of business in the next recession; and
- Start negotiating with your suppliers.
Securing a Line of Credit Now
The thing about credit is – when you need it, you can’t get
it. Therefore you have to get it when
you don’t need it. MBEs should start
talking to their banks today to line up lines of credit that will be handy when
the economy slows and banks and other lenders start changing their lending
guidelines. What often kills small
businesses during a recession is the lack of credit not the lack of profits.
Clean Up Your Receivables
If you have money owed to you, collect it now. When the economy goes into a recession, the
companies that owe you money will have an even more difficult time paying
you. So, even if you have to provide
some of your customers some incentives to pay you, it might make sense to do
that. Of course it would be better if you did not have to discount your
invoices, but it is better to have in your bank account than theirs.
Identify Competitors Who Might Go Out of Business
One of the acquisitions I did while at the GNEMSDC was done
during the last recession. I knew that a
particular organization was going to have problems when the recession hit, so I
began to monitor their performance. You
should be doing the same thing with your competitors. Your competitors all have customers, some of
whom you would probably like to have for yourself. Now is the time to begin analyzing your
market to see what companies would be good for you to acquire during the next
recession. Of course, in order to be the
acquirer and the acquired, you need to have cash and resources on hand. This is
all the more reason to talk to your bank today about your strategy. Banks have been around a long time, they like
entrepreneurs who come to them with plans to acquire commercial assets for
dimes on the dollar.
Renegotiate with Your Suppliers
At the right time, you should renegotiate your terms and
conditions with your own suppliers. Many of them, like you would be willing to
trade off profitability for financial stability. Strong buyers are in the best position to
make deals with their suppliers. But to be strong, again you have to have cash
or access to cash. The deals you can make
during a recession can last into the next expansion, which will come as sure as
day follows night.
