Need to know: Back to the drawing board

Posted on 28/05/2020

By Michael Kianfar

We are almost in June and we have lived with the pandemic for nearly three months. As we start to get our businesses back to operation, many of us are having to rethink our business plans and come up with solutions that enable us to either survive or get back to our previous trading levels. In this article I have set out some ideas or principles that may aid framing your thinking.

Ignoring the noise

The world has been getting more and more noisy and social media has played a significant role in this. A minorities’ opinion is amplified through Facebook, Twitter and alike and these opinions are often considered as worthy for attention. I am often amazed how seriously policy makers listen to these opinions – given that we are in a democracy and the voice of the majority is what should prevail.

If you were a trader in the financial markets, you would be mainly focussed on two trading strategies; Noise Trading or Macro.

If Noise Trading was your skill, you would be listening to all the chatter on various chat groups and observing every bit of news that is released on the wire. Your aim would be to jump in and out of a trade with every bit of news and cut slithers of profit on the back of many small trades.

On the other hand, if Macro was your skill then you would be consciously blocking out the noise and focussing on the fundamentals that drive the performance of an asset class. For example, if the UK releases unemployment numbers that are above expectation, you would be extrapolating that data to form views as to how that is going to influence economic prospects.

Macro traders tend to make big bets and are patient whereas noise traders tend to make small bets and are in and out of the trade in a day.

At present, I think it’s useful to consider this and see whether you are trying to write your business plan with the mindset of a noise trader or a Macro.

I would be strongly advising in favour of a Macro approach because business requires investment and you can’t jump in and out and hope to achieve meaningful outcomes. Sure, you can put up a coffee stand on the corner of the street, but you are not likely to come away with more than a humble wage on a sunny day. Pop-ups tend to pop-out very quickly.

So, what is Noise at the moment? – Social Distancing is pure noise, almost all of it is impractical and I think you will see the whole plan being dismantled in bits over the next few months. Government and in turn local authorities will dedicate huge resources  to it and make businesses jump through many hoops before some businesses will fail to comply, they will be fined, which they won’t pay and the matter will end-up in a Magistrate Court where a ruling will come from a magistrate, which will then be appealed and finally the high court will rule in favour of the business on the grounds that the measures are impractical and unenforceable. This will be the final chapter of Social Distancing. That’s just my opinion formed out of the evidence I see.

If you agree with my hypotheses, then you would be thinking, surely the Government knows this so why are they so adamant about Social Distancing? The answer is Noise. The Government has become the biggest Noise Trader of all.

Now that you have got your head around the Noise versus Macro debate, you ought to have a fresh look at your business plan and decide what you need to do that is fundamental. I have to also add that this process is not so easy. You need to take a critical thinking approach and ground your analysis with the principles of epistemology.

Remember Business is a Journey

I think many forget that being in business has a start and end point. It starts with an opportunity and should end with a sale. The concept of creating a business for subsequent generations is not inconsistent with this premise. If the business has value after you decide to come out of it then you are handing a good legacy to the next generation and if not, then you are simply tying the ball and chain that has been around you for years to your kids.

The government just announced the raising of the cap on large firm borrowing from £5m to £200m on the CBIL loans. Don’t assume these loans will simply go to prop-up the firms. The smart CEO will evaluate that they could use this cash to build scale and that often means through acquisition. With the prevailing rates, a large firm could service a CBIL loan with £7500 per annum for every £1m of borrowing. In other words, if your business was making £100K net income per year, they could pay you £1m for it and take more than £90K per annum to their bottom line.

If your business was to be a target for an acquirer, then it needs to be in the right shape and grounded for long-term success – not just a short-term gig.

If you would like to speak to Michael then please get in touch by emailing Michael's expertise as a business turnaround specialist would be particularly valuable at this time and the support is free. For more information about Forward Newhaven, please click here.

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