Thursday, October 16, 2008

Every few weeks, Mimi and I meet out of the office and review the state of the business. Typically we’re out for a few hours, have lunch and then go about the day. This week’s was more intense.

Driving to the ocean with Anne Marie Friday afternoon our conversation kept returning to the financial news and more specifically Kim & Co. I was feeling unsettled and grasping to do something that I could control and AM helped me figured that out. Finally I settled on laying out a plan that always makes me feel more secure. I bothered Mimi at home to give her the heads up on what I wanted to achieve on Tuesday and a couple of others to let people know that I wanted to speak with them before the meeting.

Sunday evening I made the poor, suffering AM drive so I could make some phone calls. The first were to my grandfathers, I needed to understand how businesses react in very bad economic times and what are the strategies to keep going and who better than men who began their careers in the Great Depression and watched their father’s keep their own businesses going and weathered several more recessions of their own. Other calls were made and at a stop I IM’d Dad and asked if he could help me with model some scenarios, him being a spreadsheet wizard.

Tuesday’s objective became, understanding what reasonable, best and worst case situation for Kim & Co over the next year given a terrible economy and what we know about the immediate future. We reviewed the booked business, then what we could expect from our contracted clients and then rated the likelihood of which outstanding proposals could close. A trait of my business is that the period between the contract and fulfillment can be quite long, sometimes eighteen months, which at times can be frustrating, but in today’s environment can be a benefit. Any project in the next six months is likely to happen, the scope may shrink, perhaps a lot, but the project will happen. For projects due in six to twelve months there is a higher possibility of cancellation, but most of those look pretty locked in.

The long and the short is we’ll survive a sharp down turn, at least for the next year. Assuming steep recession the most reasonable best case is that I’ll have enough business for one additional FTE to be covered by contractors above my permanent staffing (down from 3-5 at our busiest) and in the worst case we’ll have the manpower to tackle some of those when we have time projects. At best my revenue will be down next year from the last, but the bills will be paid and the doors will still be open. But I’m not planning on any extravagant purchases.

I slept better Tuesday evening.



Anonymous Anonymous said...

This recession could be a doozy. The reality is, no one has a strong idea of how bad things truly are. Not even Treasury Secretary Henry Paulson.

I am *hoping* that the markets have priced in much of the anticipated damage. But that might be wishful thinking on my part.

It sounds as though you've thought through various scenarios. Undoubtedly, actual events will play out differently, perhaps much differently. The benefit of thinking through the various scenarios is not so much to define your bookends. But rather, you begin to think through your options should certain events unfold. Now having thought through different options, you are better positioned to react to whatever comes your way.

Just remember, though, things often do unfold much differently than anticipated. One just has to look at our current mess. At the beginning of 2008, how many thought we would be in this mess, this deep, at this time of year?

I have a hunch that the next few months will be extraordinarily challenging for many businesses.

Good luck!


9:58 PM  
Blogger Kim said...

K: Thanks. What we have is a snapshot and a guess. I'll need to revisit this frequently, but at least I have the baseline.


11:32 PM  
Anonymous Anonymous said...

Having run a business through three downturns, I can offer this:

First of all, "safe" contracts may not be all that safe. Apparently really solid buyers can very suddenly go belly-up, right out of the blue. You can count on nothing.

You have to pay a lot of attention to liabilities. Anything that has a "pay later" feature that might crop up in the next 18 months can very quickly turn lethal. Anything long-term has to be approached with extreme caution. However, good long term deals made at the bottom of the slide can be extraordinarily rich later on.

There are other major silver linings though: for one thing, talent starts becoming a lot more available, cheap, and loyal. Especially the loyal part, because they are scared.

Hang in a a year or so, and if you are still alive and functional, pretty soon capital comes looking for you, and terms tend to be a lot better than you used to expect. They are desperate for even a little return.

6:46 AM  
Anonymous VJ said...

"At the beginning of 2008, how many thought we would be in this mess, this deep, at this time of year?"

Umm Plenty of Economists Did. Dean Baker for one (CEPR.NET). He was screaming about the dangers of the housing bubble years ago. Hale 'Bonddad' Stewart of DailyKos & then Huff Post did the same on the general economic dangers we were about to experience. And of course anyone reading or hearing from 'Dr. Doom', Nouriel Roubini of NYU's Stern School of Bus. would have gotten a heads up at least 2-3 years out too. []. So did Paul Krugman BTW.

So I did listen and heeded the call. And took out 60% of my net worth and stuck it in a very large bank, and a series of CD's & Money Markets. Two years ago. We lost some 'opportunity cost' money. But as they say you can't time the market.

But living through a severe recession is doable with plenty of simple common sense. You don't spend for what you merely want, but on things that you absolutely need. Probably for production or output purposes too. You have and keep a strong 'cash position'. You try and keep current on accounts. You make deals with good & steady clients to keep them up and current on accounts if possible. You work out sharing arrangements for critical equipment you just can not afford. You pay people what you can, and 'under the table' if necessary. You do everything you can to try and keep moving forward at the cheapest cost possible, and the least risk imaginable. Here's hoping Kim & Co rolls with the swells but remains solvent & survives the turbulence. Cheers & Good Luck, 'VJ'

4:13 AM  
Anonymous Anonymous said...

Umm Plenty of Economists Did.


Granted, there a few bright fellows like you who managed to escape the calamity totally unscathed. You'll note in your quote, though, I asked how many, not if anyone. Big difference, no? Thus, my question implies that there were a few. The best that I have seen predicting this mess have been Bill Fleckenstein and Paul Volcker.

Aside from those bright few people--including yourself VJ, most did not see the full height of the approaching tsunami. As part of that most category are Wall Street's brightest and most aggressive chieftans.

Yeah, I saw it coming too. But I didn't think it would be as bad as it is. Apparently, I am not alone. In fact, I would even go so far as to say I am ahead of most. Unfortunately, however, I was not aggressive enough to short those many companies that would go to zero, or near zero. And many bright, smart, aggressive people did short.

You VJ and I, we're lucky. Just imagine all those unfortunate souls whose jobs and livelihoods depended upon smart people to prevent this mess. Many unfortunate people who played no role in this affair will be wiped out.

Anyway, our ramblings about who foresaw what and when is kinda fun, but in the end it is just mental masturbation--it feels good but it really doesn't amount to much.

Reality is, we're in a mess, whether we saw it coming or not, whether we like it or not. I just hope Kim is able to plan and act accordingly to ensure that her business survives.


5:37 PM  
Anonymous Anonymous said...

Though I am not a subscriber to James Grant's Interest Rate Observer, I suspect strongly that James Grant foresaw this mess as well.

He has an excellent article in today's WSJ The Confidence Game. You'll likely need a subscription to view.

Federal Reserve Chairman Ben S. Bernanke and his predecessor, Alan Greenspan, were fine ones for believing impossible things. They propounded them, too. Never mind asset bubbles, they said. Not only can't you predict them, but you can't even recognize them after they've swollen to grotesque maturity. Better just to tidy up after they burst. Now Mr. Bernanke is likening our present troubles to those of the 1930s. The comparison is more confidence-sapping than he seems to realize. From peak to trough, 1929 to 1933, the gross domestic product was almost sawed in half, before adjusting for changes in the purchasing power of the dollar. No such mitigating fact helps to explain today's set-to. It's a crisis of competence of our financiers, of bankers and central bankers alike.


6:29 PM  
Anonymous VJ said...

Yes, James Grant is one of my perennial favorites, and he's been talking about this situation since forever. But as sort of a 'super-bear' he'd missed out on the last market run up totally, if he followed his own advice. But none of this is strictly academic. We're above water today as a business precisely because of the concrete steps we took almost as long ago as 5 years out, including our banking relationships. They've been largely untouched in the greatest credit squeeze & melt down here of the last 80 years. Now that's saying something. Some of it was dumb luck, but we stuck with it too.

But yeah, we've been missing the likes of Jim Grant on the TV. They only call the likes of him in when their worlds are falling apart. Just so he can tell Them 'I told you so way back when...'. It's some sort of perverse pleasure I imagine. But you've got to wonder about the damn bankers that yes, continually get us into these debacles. Cheers & Good Luck, 'VJ'

6:25 AM  
Anonymous Anonymous said...

James Grant also has an interest in appearing in the media as he will soon be releasing his new book, "Mr. Market Miscalculates: The Bubble Years and Beyond."

I am sure I'll enjoy the read.


7:47 PM  

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