Politics Is Bad For Business
Politicians the world
over get scared when they see slow or negative economic growth in their country
– mainly because it means they may not be re-elected.
A country’s survival and ability to maintain a certain
standard of living and security for its citizens both depend on developing its
“revenue-producing” abilities. These
affect growth which itself depends on a variety of factors, the chief one of
which is confidence that things will
continue in a certain way. If this
confidence exists, businesses can plan to:
·
Invest in their business;
·
Grow their business;
·
Develop long-term growth strategies;
·
Hire, train and develop staff;
·
Obey the laws and regulations of the land;
·
Pay taxes.
One can see clearly the effects of a lack of confidence on
both a “macro” (countrywide) and “micro” (company) level. On a “macro” level, there will be:
·
No investment in a country’s revenue-producing
capabilities (i.e. no new businesses or no increased investment in higher revenue-producing
capacity).
·
Reduced or negative growth and/or reduced
productivity.
·
Companies “hoarding” cash rather than spending
it.
·
Price increases as certain goods become more
expensive (note: this may also happen when the price of commodities such as oil
increases).
·
A “bunker mentality” where people and businesses
simply go into “survival mode”; no investment, hiring, new product development
or unnecessary spending.
·
Increased unemployment as businesses reduce
staff numbers (and therefore costs) to the minimum necessary to survive.
·
Reduced tax income for government as businesses
and individuals cut back and, in the case of individuals, find themselves
jobless.
This results in either increased government
borrowing to fund expenditure (not good in the long term or in reduced
government expenditure which provokes public discontent.
On the “micro” (business/company) level, you will see:
·
Cost cutting as businesses prepare for hard
times.
·
No hiring of new staff due to lack of confidence
in the future.
·
Reduced/no investment in training or R&D.
·
Low staff morale due to cost cuts and reduced
staff numbers.
·
Possible reduction in product lines to those
necessary for survival.
·
Reduced productivity (and therefore
profitability).
·
Shorter working hours.
In the past, governments have increased confidence and
economic activity by increasing the numbers employed on the government payroll
(i.e. the “public sector”). This is a “false
economy”, as it creates initial job growth, but it inflates public spending (to
pay the increased salaries) which has to be covered by raising taxes or
increased borrowing.
From what has been said above, politicians and governments
need to have a clear plan and not to be seen as wavering, indecisive wavering
or delaying policy implementation.
Equally dangerous is an approach which sees constant changes. In hard economic times, consultation and
decisiveness will produce better results than populist decisions based on a
misguided desire to ensure one’s own re-election. This may mean that, occasionally, politicians
will have to take unpopular measures.
Our world is seeing more uncertainty and a faster pace of
change as a matter of course. As a
business, what can you do? I see several
actions:
·
Join your local Chamber of Commerce or Business
Group. Politicians find it easier to listen
to large groups.
·
Engage with your local politician to advise on
your area and business sector.
·
Hold a “cash reserve” as large as you can to
cover your business during hard times.
·
Understand what your “core business” is so that,
should you have to cut costs, you don’t cut the ones that actually bring in
your main revenues.
I have spent more than half my life
working in different world markets from the most developed to “emerging”
economies. With more than 20 years in the world financial services industry
running different service, operations and lending businesses, I started my own
Performance Management Consultancy and work with individuals, small businesses,
charities, quoted companies and academic institutions across the world. An
international speaker, trainer, author and fund-raiser, I can be contacted by email . My website provides a full picture of my portfolio of services.Labels: Crisis Management, Financial, Productivity, Regulation, Risk, Selling, Strategy
How Does Deposit Flight Affect My Business?
A number of those with whom I work have asked me why it
matters to them that some European countries are experiencing a “flight of
deposits” to other countries. Here’s the
businessman’s answer.
One of the most basic roles that banks undertake is that of financial intermediary between those
with surplus funds (savers) and those with a deficit (borrowers). Banks take in savings and lend them to
borrowers. Savers are paid interest. Borrowers are charged interest. The
difference between the rate of interest paid to savers and that charged to borrowers
is kept as profit by the bank.
Banks also borrow in the “money market” from other
banks. This is generally at higher rates
than those which they would pay to savers.
Some of the banks which collapsed during the financial crisis relied
more on the money markets for deposits than on personal or corporate
customers. When the other banks refused
to lend to them, they had nowhere to turn and so had to be rescued or go out of
business.
If a bank needs more deposits, it needs to attract savers to place their funds with
it. This can be done by paying higher
rates of interest. If the bank can’t
increase the rate of interest that it charges to its borrowers, it makes less
profit. If it makes less profit, people lose
confidence and won’t lend to that bank and sell their shares because the bank is
less able to generate profits to sustain its business and grow its capital
base. In an extreme case, that bank goes
out of business.
A bank may be seen as weak due to its own problems, or
because it is located in a “weak” country.
Banks in those circumstances may see deposits taken out and transferred
to banks in “stronger” countries because savers are worried about whether
the value of their savings will shrink or that savings may be converted into another currency by government edict.
As a result, the bank has to:
·
Pay higher rates of interest (reducing
profitability);
·
Reduce the amount that it lends to borrowers (reducing
economic activity and growth);
·
Cut costs to maintain profitability (reducing
economic activity and growth);
·
Seek help from its central bank;
·
All the above.
Governments, central banks and other
organisations may lend to these banks to shore up their deposit base and support
continued economic activity. In Europe
at present, the banks in question are often not lending these new funds out,
but using them to bolster capital.
If you’re buying from a supplier in a “weak” country or of a
“weak” bank, the impacts on your business may be:
·
Supplier has to pay a higher price to banks for
export finance which translates into a higher price for the goods that you buy
(reducing your profitability);
·
Supplier may not be able to obtain export
finance due to cutbacks by their bank. Either your business’ bank will have to supply
credit (increasing the cost of goods purchased and therefore reducing your
profits) or (if your supplier has sufficient cash reserves) they may permit you
to pay on “open account” terms.
·
Supplier goes out of business, forcing your
business to seek alternative (and perhaps more expensive or less reliable)
suppliers.
If you’re selling to a buyer in a “weak” country or of a
“weak” bank the impacts on your business may be:
·
Buyer has to pay a higher price to banks for
import finance which translates into a higher cost of the goods that you sell;
·
Supplier may not be able to obtain import
finance due to cutbacks by their bank.
Either your business’ bank will have to supply credit (increasing the
cost of goods sold and therefore lowering your buyer’s profits) or (if your
buyer has sufficient cash reserves) they may be able to pay on “open account”
terms.
·
Buyer goes out of business, you lose money and
may be forced to seek alternative (and perhaps cheaper or less reliable)
markets.
Currencies of “weak” countries also fall against other
currencies. If you invoice a buyer in a
“weak” country in a strong currency, your goods become more expensive and your
buyer may buy less or take longer to pay.
If the buyer pays higher interest for import finance, this worsens the
situation.
If you’re buying from a supplier in a weaker country, goods become
cheaper. If you invoice in that
country’s currency, your profits suffer as they convert into lower amounts of a
strong currency. If you have to supply
extra credit, this reduces your profits further due to interest charges.
Some businesses may be able to ignore the impact on their
cost base by simply passing their increased costs on to their end buyer. Others aren’t so lucky.
I have spent more than half my life working in different world markets from the most developed to “emerging” economies. With more than 20 years in the world financial services industry running different service, operations and lending businesses, I started my own Performance Management Consultancy and work with individuals, small businesses, charities, quoted companies and academic institutions across the world. An international speaker, trainer, author and fund-raiser, I can be contacted by email . My website provides a full picture of my portfolio of services.
Labels: Crisis Management, Customer Care, Financial, Risk, Selling, Strategy
