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A budget for economic recovery

Q. Your previous column about budgeting cautiously for economic recovery was helpful. Can you please expand on this? A. The problem is that no one knows exactly when the economy will recover. What happens in your business, in any business, between now and Q4 has already been determined by the actions you have taken in the last few months. So you should not change your plans to budget for any substantial positive effect in that timescale. If the most optimistic forecast is correct and the UK economy resumes growth in the final quarter of 2009, we still won’t know for sure until February 2010. But important contributory data such as the trend in bank lending to businesses and mortgage lending is published more frequently and is closely correlated with general economic growth. You must take a view about the time lag between general economic recovery and its influence on your business. If you have zero lag, in other words you benefit simultaneously with a resumption of growth, then the difficult call is whether you include some growth beginning in the third quarter 2009 or the first quarter 2010. The effect of doing so and getting the timing wrong may have a critical effect on your inventory and cash flow.  I recommend that you take the conservative view and don’t commit too many scarce resources too early. If the growth you anticipate doesn’t materialise, then you may be in a weaker position in subsequent quarters when recovery does arrive. In the meantime, make sure you understand how you intend to finance growth. If you have conserved the necessary human and financial resources then you are in a strong position. If you need to acquire these you may be unable to do so at short notice. Now is a good time to establish your access to resources when you need them and to understand the conditions under which they are available to you. Review your timing every month and design a spreadsheet that enables you to test the effect of bringing forward or delaying the start of recovery. Think through the impact of a resumption of growth for two quarters followed by a return to decline for two quarters and then modest growth (the ‘W’ shaped recession). Don’t assume that the way out will be smooth. For most SMEs, access to finance will remain patchy and be expensive for at least a year after growth resumes. Businesses dependent on the availability of consumer credit will find this a frustrating time when their customers want to buy but cannot obtain or afford the necessary consumer credit. Get your suppliers to help resolve this. Assume that inflation will return at around 4 per cent pa by the end of 2010 fuelled by wage demands, energy costs, price recovery as discounts are cancelled and the general effect of monetary policy. Assume that taxation will increase irrespective of the Government in power. These increases are likely to be in the form of VAT, national insurance, environmental taxes and the reduction of tax allowances. It may sound complicated, but the way out of recession is never easy or predictable.

Anthony Holmes is an international corporate turnaround specialist and transitional leadership expert. He has led the revival of seven companies over 15 years and his 30-year international business career spans strategic consultancy, investment banking and senior corporate management in a diverse range of industries. Holmes’s book Managing Through Turbulent Times is out now with another, A Time to Lead, A Time to Manage, to follow.

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