It adds up to … reduce debt
27 Oct 2008
Many of you will be expecting me to cover the characteristics of a successful business today, but this will have to wait for one more week — although some of the points I am going to raise do apply to making any business successfully make money.

In global credit/financial/economic terms it has been another incredible seven days. The western world seems obsessed with the question of whether it is or is not in recession. Today’s great economic brains are trying to establish why, (in Alan Greenspan’s words), “the world’s financial markets have been engulfed by a credit tsunami”. The answers to both questions are linked.

Just over 12 months ago, I suggested in this column that the western world was headed for a credit catastrophe; put another way, a debt catastrophe. Among the facts I quoted was that of a major UK retailing group advertising “Half price lounge suites. No deposit. First payment in 12 months’ time.”

There is the reason for the catastrophe. Banks, financial institutions and retail groups, have sold money — credit — like it was going out of fashion. Well, it certainly is out of fashion now!

What compounds this situation is that interest rates have been cut to stimulate demand and reduce operating costs for businesses. One way of looking at this is that those who as yet are not over their heads in debt will quickly be joining those who are. Of course we are in recession. People haven’t got disposable income to buy anything other than their truly basic essentials.

Equally, this is not going to improve quickly, (at least two years), simply because the vast majority of the world’s population does not have access to real income growth. Neither has it saved.

U.S. economist John Galbraith said some 50 years ago, in his book The Affluent Society, that an obsession with growth in national income, consumer expenditure, jobs and capital investment leads to the production of waste — goods and services that people do not genuinely need.

It is hard not to agree with much of his principle. Massive levels of greed are paralysing our financial and economic structures. It is important that we genuinely learn from our mistakes.

We in South Africa can almost hear the collective sigh of relief that we are not as affected as the rest of the world.

My suggestion — for all businesses — is to believe that a credit tsunami will find its way to our shores sooner rather than later. Personal and commercial debt figures when they are announced will, I believe, show that many of the credit demise symptoms are already with us.

How often have you been offered additional credit facilities from banks and retail groups? Recently, I had to apply for a credit card in order to hire a car overseas. The person handling the transaction at the bank asked how much credit I wished to put on to the card. When I said none, (intending to “pre-load” the card with funds), I swear to you, she nearly fainted with surprise.

The way forward is to find any and every way possible to reduce your business’s operating breakeven level.

Put on hold any capital investment and, perhaps above all else, direct your strategy to doing everything possible to reduce debt. I have covered the major principles in this connection many times in this column: don’t be frightened of price, look for opportunities to improve gross margins, remove any cost that is not adding value to your service or products.

If you are successful in these areas, you might just save your business, house, shirt and everything else you own when the tsunami hits — providing, of course, you still have a market to sell into.

frankgreenfield@iafrica.com