(why it’s now time to get off the tiger)
The door bell rings just as Geoff is getting into the shower. His wife, Sue, has just finished hers. She quickly wraps herself in a towel and runs downstairs. When she opens the door, there stands Bob, their neighbour. Before she says a word, Bob says, ‘I’ll give you £1,000 to drop that towel…’ She thinks for a moment, then drops the towel and stands there naked. After a few seconds, Bob hands her £1,000 and leaves. Sue wraps back up and goes upstairs. When she gets to the bathroom, Geoff asks, ‘Who was that?’ She replies ‘It was Bob from next door’. ‘Great,’ he says, ‘did he say anything about the £1,000 he owes me?’
The moral of the story is: If you share critical information on credit and risk at the right time, you could prevent avoidable exposure.
And that’s why I write my newsletters…you see I support your clients to make decisions that are right not just for now, but also for the future…
and you never know, you might find them useful in your own business!
We’ve got a lot to get through, so read on – and don’t forget to read the two great offers at the bottom of this mailer!
I’ve a question for you: Is this recession (and recovery) following a pattern and if so, what’s next?
Right now, we’re out of recession, or at least that’s what we’re being told. But is what we’re being told real? Where could we be going next? What impact could that have on you, me, your and my clients, our families?
Let’s look at one aspect of what’s happening out there…
What I’ve seen in my time on this planet is that when the prices of assets like stocks or property rise, ‘insiders’ get in early, then use their experience to sell on to ‘outsiders’ in a game of pass the parcel. Those outsiders are lured in by the hope of rich pickings hoping that the upwards trend will continue forever or that they can exit just before the trend stalls. Greed, jealousy and a desire to avoid missing out on easy profit are typical motivators. The insiders know when to get out, or how to make money from the market in different ways, the outsiders sit ride the tiger and then when price starts to go south, hold on equally tight to the bear’s tail. Such outsiders include not just the investors themselves, but also the banks who lend to them – often chasing market share, they too are caught up in a feeding frenzy, increasingly throwing caution to the wind. But it’s ok, because everyone is doing it, or at least that’s what they convince themselves, because there’s safety in the herd.
The investors borrow money from over-eager banks to invest in the rising market because the anticipated capital gain exceeds the cost of borrowing. And at the moment I’m seeing a lot of inexperienced outsiders following the trend. The problem is when such margin trading goes wrong, it goes horribly wrong. And here’s evidence of the extent of margin trading – investors borrowing (‘margin debt’) to invest in the stock market. As you will see there’s a spike right now.
The point is that every time there has been such a spike, it’s followed soon afterwards by the real economy plunging back into recession – the highly leveraged speculation we are seeing right now has only ever ended badly. And there’s a similar thing happening with property in the South East, where ‘capital gain trend followers’ are ignoring our Midlands based, longer, less sexy, deals to pursue short term London property opportunities. Opportunities for a good level of growth here in the sticks are falling by the wayside for want of funding.
So there is a pattern, and it is: market/price goes up, profits are generated; momentum grows as more investors and lenders are attracted; outsiders marvel at the paper profits they’re making and re-invest them in the rising market; insiders quietly exit; something major happens to disturb the market – maybe a change in interest rates?; there’s panic, price plunges to below the level of bank debt; the panic intensifies, banks stop lending; mainstream economy falls into recession; once at the bottom the insiders return to the market, having hoovered up the outsiders’ savings.
There are two issues –
Firstly right now money that could otherwise have gone to support real businesses such as yours is being diverted into speculative lend in the stock and property markets – and
Secondly in the past when such bubbles burst, the banks not only stopped lending on such speculative deals, they stopped lending right across the board, including to real businesses. So right now while the tap might be on, even though you may not feel like it is, but when it gets turned off, you can expect to see your facilities reduced.
Let’s explore what this means for you, me, your clients, all of our businesses and families…
We’re all feeling a little more flush than we really should be – I bet your annual pension fund statement showed you did quite well last year, I guess you’re feeling a little happier as your home has again started to go up in value? The point is it is not real, it cannot be converted pound for pound into cash. Like the outsiders’ paper profits, they’re meaningless.
Secondly, if you thought funding your project, business or practice is difficult today, or if your business is just holding its own, don’t expect any improvement going forward, in fact there’s every chance things could get much more difficult. It’s a good idea to plan now for a more difficult future – to make important decisions sooner rather than later, because the risk of waiting for the optimum time to take action is too great – do as the insider, not outsider does.
Here are some tips:
1. Get those bank finance lines put in place early, and with some leeway for further shocks to the system;
2. Start investing now in new marketing initiatives, growing your business into areas that others can’t or won’t move into – you’ll need to have these areas fully developed so you can turn them on when needed. Spend money on marketing, don’t cut back;
3. Finance your company or project in ways that involve little bank finance even if it means you giving more away than you’d intended – think about getting an investor in, try that crowdfunding, sell your investment property now when the market is still strong;
4. Start reducing your fixed costs, converting as many as you can to variable;
5. Reduce your personal cash commitments, if you can, so you put less pressure on the business;
6. If your business is already on the verge of insolvency now and you are either short of money or simply don’t have the stomach for a lengthy fight, then don’t waste any more time or effort, move on to something else now;
7. Restructure the business now when you have more money, resources and options.
And that takes me on to this month’s offer for the sector that I believe will struggle most in 2014 ….
‘The End of Lawyers … as we know them?‘
‘The End of Lawyers‘ is the title of a hardhitting book by Richard Susskind. Perhaps we should add the words ‘as we know them’ at the end, because while we’ll always need lawyers, there are now more ways than ever of delivering legal services?
Here’s a few of the more recent casualties in the sector – Linda Myers; Challinors; Cobbetts; Barnetts; Hilliers HRW; Hacking Ashton….
They are living proof that being good, even great, at what you do doesn’t stop you from going under. Here’s what Andy Hemming of ActionCoach has to say……….
Good lawyer? Not good enough…….
We’re living in the experience economy, so it’s no longer good enough just to exhibit a high level of professional competence. The world is changing fast, and when it comes to the law, here’s one I especially like:
“Change is the law of life. And those who look only to the past or present are certain to miss the future.” (John F. Kennedy)
I’ve noticed in the professional services (and especially the legal) sector that things are polarising – a few innovators are rethinking their business model and thriving as a result. The vast majority are doing more of the same because it’s worked in the past.
Unfortunately, the pace of change in the market place means that we all need to keep reinventing ourselves, and being professionally competent isn’t enough to differentiate yourself any more.
So what are you doing to stay ahead of the game?
There has never been a better opportunity than now to catch the growth wave. A clear strategy and the discipline to execute a great plan can put you head and shoulders above the large majority of the market.
- What does your strategy and plan look like?
- How clear is your team so they can help you achieve it?
- When was the last time you critically evaluated your activities in order to make change to your modus operandi?
Take action now! We can offer you a complimentary, no obligation session with one of the UK’s top business coaches to help you get clearer on the way forward.
To take up Andy’s offer, call him direct on 01562 734065 or email him at email@example.com. Confidentiality is assured.
And if you are closing down your lawyer’s practice or part of it, you’ll have a huge storage problem – ask Dave Rose of L&R Services for a quotation for storing and ultimately confidentially destroying your records – he’s used by numerous IPs, accountants and lawyers – I have used him for almost 25 years now, there’s no one better in what he does and he does it at a great price – tel 0121 555 8838.
Thanks for taking the trouble to read my newsletter, please let me have your feedback, good or bad.
And don’t forget, I’m here for all your formal insolvency needs.
Paul Brindley FCA