Need to know: Business is a journey
Posted on 10/06/2020
By Michael Kianfar
One important aspect of a business plan is context, and this is often overlooked by entrepreneurs during the analysis process. If you have been following the analogy that I have been referring to in part 2 (a trip), you could consider context as the weather conditions that impact your flight.
Consumer behaviour and its dynamics affected by macroeconomic or political conditions have a significant impact on the cash flow projections. Economic Shocks are a feature of any business plan but if those shocks knock the business off its ‘normal’ development path then you have to make adjustments. Consider it a storm that has knocked your flight off its flight path and you may now be flying to a different destination. I will attempt to explain this by referring to the case of the USA.
The incident of 9/11 was a huge shock to the USA, and I won’t relive that horrific event in this article, but I want to draw your attention to how the event changed the context for business.
Firstly, Americans became very cautious and this changed their consumption behaviour. When people are nervous their system of trust changes and they revert to the natural instinct to trust who and what they know. In business terms that equates to brand. This was really bad news for the US small business sector as people opted for recognised and established operators as oppose to giving new a shot. Post 9/11 the failure rate of new businesses surged whilst at the same time the corporate sector experienced a strong recovery.
People accepted new norms and you only needed to go to an airport to see what crazy routines people complied with. People would form 100m lines at check-in, get near naked whilst going through security and willingly throw into the trash an $80 bottle of perfume because a $12/hr person told them to do it. They are doing this whilst watching a team of construction workers (and a crate of tools) walk straight past them into the airport lounge to expand the perfume shop that is growing nicely now that people have to linger at the airport for an extra 2 hours.
The 9/11 storm changed the context and 20 years on, we can see that the change was permanent. Then came the 2008/9 financial crisis.
The impact of the financial crisis was in fact more subtle and I think the damage to the SME sector was far more significant.
Pre 2008, Americans were enjoying life by cashing in their home equity and spending it on just about anything they liked. There was no fear for their jobs because there was always home flipping that could give them a healthy income.
In some parts of the USA the typical price of a track home (those that are built on a strip, all looking the same) dropped by 80% in 2009. Negative equity and debt burdens forced repossessions and many Americans really suffered.
Remember this happened just seven years after 9/11 and as aforementioned, the SME sector (the place where many would get jobs or create income opportunities) had already taken a back step. Not everyone was going to get a job as a designer for Nike or developer for Google.
In the few years after the financial crisis, what is interesting to observe, is the growth of altruism. The number of registrations for charities grew and so did applications for Public Sector Administration (‘PSA’) jobs. The growth in registered charities grew so much that many US states restricted registries. By the way the US call these non-profits.
You see, when you have a non-profit entity, it simply means there is no profit, it doesn’t mean there is no cost. You can be employed by a non-profit and receive a decent salary – people have to eat as the saying goes. To get one of these going, you just need a cause and get your begging bowl out.
PSA job applications surged because these jobs are coveted. There is ok pay, great pension, much less accountability than the private sector, which gives people that highly cherished goal – work/life balance.
Now you have to look at what was happening on the supply side of the economy. The financial crisis raised the issue of scrutiny & compliance. People believed that business must be supervised for the greater good. We had the makings of the perfect storm – a society that was nervous and distrustful post 9/11, a financial crisis that highlighted the potential need for governance and huge demand for PSA jobs. Welcome to the SME’s worst nightmare – bureaucracy.
Since about 2011 the USA got stuffed with bureaucracy. Rules, licences, permits and guidelines. This was now a huge industry in its own right. For every rule there would be thousands of PSAs and almost double that in consultants that would aid the business with compliance to the rules. For the SME sector this was like concrete being poured into the arteries. Many became disillusioned and felt the context for business was so opaque that they could plan no meaningful growth trajectory.
Politics aside, there is a belief that Donald Trump's support came from the SME sector because he vowed to tear-up bureaucracy.
I hope I have made the case for context and in June of 2020, we have to take note of the events that have occurred and develop a reasonable hypothesis for the what’s ahead of us. I am believer in the free market economy and feel that with the least amount of interference, things will go back to normal very quickly. I fear however that the state cannot resist the temptation to stuff everyone with bureaucracy and SME sector ought to take this into account when projecting future cash flow.
If you'd like to speak to Michael about the road ahead for your business, please get in touch and email email@example.com