The Crises of the Economy. How to prepare?

March 19, 2013 | By More

 

“Has your business been affected by the economy”? I ask this question to almost everyone I encounter or know to own a business and the answer is very obvious, “Of course who hasn’t”. The second question I ask is: “What have you done to foresee and counteract”? The answer to this question is not so clear because most of us have not done anything, many even had to shut down their companies and give up. Fact is, if by 2007 you had only been in business for 5 years or less, chances are that you have not seen any economic fluctuation; if you did not study economics or business administration you would not know how to read the warning signals and probably put out everything you got into building your business, instead of preparing for an economic down fall. It is hard to anticipate how the economy will develop and even harder to quickly act to avoid the worst.
 

The Economic Crises. How to Prevent


I believe everybody lost money in the past 6 years, some of us adapted quickly, some shut down and some went bankrupt. Small Businesses were likely affected much more as they do not have the stamina or reserves larger corporations have. We cannot do anything against the past, the milk in that glass has been poured and we won’t get it back in, in anyway. However as a business person we encounter up and downs all the time and the difference between winning or losing is, if you can adjust fast enough, if you can pull yourself through no matter what. You will only loose if you stay down and give up after you get knocked down, but you will never be defeated if you get up this one more time, no matter how hard it may seem. I like to share my own story in this regards, I did not have any more knowledge on how the economy would turn out, but I quickly realized I had to be pro-active.

I love Real Estate, buying, selling, investing, developing, etc. My favorite is commercial Real Estate and obviously one of my businesses is a Real Estate Company. I am passionate about it, I recruited over 75 Agents by the beginning of 2006; life was great, money was pouring in and we had a blast. We were a classy boutique style company, I wanted to stay entrepreneurial and relative small because I realized the volatility of the Real Estate business early on and I needed to be able to act quickly if I had too. Pretty much at the same time I was starting to think of the need of a new and larger home for my company, but I wanted to do it the right way. I was not willing to catch all the overhead cost of a big office space, just in case the revenue would go down.

Now, even though we all know the basic principles of live and common knowledge, we rarely believe that bad things are happening to us until it is already too late. Everything that is up needs to come down at a time and likewise everything what is down can only go up. In the first quarter of 2006 I said to myself, this can’t continue like this, prices were tripling within 12 month periods, Miami was a hotcake for Real Estate investors.

I even advised my agents not to get into condos anymore or sell any to investors if they wanted to keep a good reputation. In the last quarter of 2006 I saw it. The listing inventory went from almost no availability to over 1000 properties on the market by the end of December. It appeared that all of the sudden the Real Estate market came to a halt. It rippled through 2007, with people still not realizing that the boom was over with mortgage businesses, Real Estate Companies and Banks going bankrupt and disappearing overnight as the foreclosure wave hit the market. Was I able to prevent it? No. Did I react fast? I think I did.

I eliminated all unnecessary expenses and kept the company alive with about 15 Agents left, most of them now part time, as the market was not moving one piece of Real Estate anymore. Our sales average went from about 35 Million per year down to about 3 Million, but because I had set my company up in a virtual office environment I was able to eliminate almost all of the expenses, so we still made some income, but not as much.

Even though many did know what was coming, no one really thought it would be that hard. I completely disregarded too many thoughts about it, I wanted to stay in the Real Estate industry, so I acquired a commercial office and turned it into a business center. I thought that it would fit in any economy, where people needed to save money and at the same time wanted to start, expand or downsize their businesses for a fraction of the cost of a traditional office space. I was able to keep my Real Estate Company afloat which gave me a lot of credibility later on, as people recognized I was one of the few smaller companies in Miami which made it through.

Overhead is a killer, when money stops coming in and bills have to be paid, you can calculate very quickly how long it takes before you have lost everything. In my story I did the right thing. Was it easy? Not at all, but that is another story. Was there risk involved? A lot!  Did I think it would take me 5 years to recuperate? No. All I did was refusing to give up. I made fast adjustments and worked on a new concept which I believed in passionately. It worked out at the end, because somehow it had to, what else could I have done other than walking away?

In my case it worked out when for many others it did not. Can we prepare for an economic downfall? Can we read the signs and act early on to prevent it or prevent the worse? I believe to a certain degree it is possible. The hardest thing for most small businesses is to allocate their assets properly and build reserves to be able to navigate through the ups and downs of the economy.

Look at the economy like the four seasons. Summer is the booming time, Autumn is the recession time, Winter is the depression time and Spring is the recovery phase. Every large corporation knows how to identify the seasons and what to do in each of them.

Did you think it was a great idea to continue investing money in overpriced Real Estate when we were already in the hottest summer of the century? Of course not! When you hold it in front of your eyes now, it is so obvious. However it requires a lot of discipline to not get sucked into the media bubble, making us believe how great everything is and that we should buy more stuff and more properties with 107% financing, use your credit cards and refinance your house pay them off and use them again. Come on people, we know it can’t go on forever. But it is the psychology behind it which makes us believe we need to get on board before it is too late. Who wants to miss out on these great opportunities and the all-time low interest rates, right?

In fact, the best time to invest in anything is the winter time. Prices are down, up until now they have even deteriorated to less than a third of the value of what they were worth at their height “Summer time”. Unfortunately the number one expression I hear nowadays is “I wish I had cash to invest” Guess what, this is how the big gets bigger, they buy everything they can get their fingers on for billions of dollars and make a killing once the economy moves towards spring time. No matter what it is, commodities, company stock, Real Estate it will all stabilize at a certain point. You just need to stop listening to what the media tells you, you need to start using your own head, research and listen to experts.

What are people like Warren Buffet or Donald Trump doing, when do they get back into the market?  Read about them, mirror them, do what they do and you will notice they likely go against what everybody else does. It is because they have been there; they have lost billions and made them back. It is because they started to understand you cannot put all your eggs in one basket. If one investment does not work, you have to adapt quickly to one which does. Something will always work, no matter how bad things look like, even though sometimes it just means to hold on to your money and downsize as quickly as you can.

Ask yourself again, can you prevent or can you really foresee a downfall in the economy? I believe you can, it requires common knowledge and critical thinking. You need to find the point of comfort where you can let go before the market is overheating and then just stick to your plan, invest, train and market in winter, so you are ready to reap the benefits of your harvest. It requires strength, because you will go against what everybody else will do, but once you figured out and have prepared for one full cycle of the economic seasons you will be the one coming out on top. Follow the word economy; educate yourself about economic trends and indicators.

Take a look at them right now. How is the federal debt? Unemployment rates? What is being spent for war and international affairs? How is your own business doing? What are the trends of businesses expanding and flourishing even in bad times? These are all indicators of a strong or weak economy, do not listen to the media, they just have another opinion. Follow the experts and trust your intuition. You will be prepared for the next big thing to come.
 

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Category: Finance related, Starting and building a business

carsten@officentos.com'

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